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STUDY MATERIAL

PROFESSIONAL PROGRAMME

ADVANCED COMPANY
LAW AND PRACTICE

MODULE 1
PAPER 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
tel 011-4534 1000, 4150 4444 fax +91-11-2462 6727
email info@icsi.edu website www.icsi.edu

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THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

TIMING OF HEADQUARTERS

Monday to Friday
Office Timings 9.00 A.M. to 5.30 P.M.

Public Dealing Timings


Without financial transactions 9.30 A.M. to 5.00 P.M.
With financial transactions 9.30 A.M. to 4.00 P.M.

Phones
41504444, 45341000

Fax
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Website
www.icsi.edu

E-mail
info@icsi.edu

Laser Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, and


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ADVANCED COMPANY LAW AND PRACTICE

This study material has been published to aid the students in preparing for the Advance Company Law and
Practice paper of the CS Professional Programme. Company Law has undergone radical changes over the past
few years, so is the procedural requirements relating to compliance under various provisions of the Company
Law. As the Company Secretary plays an important role in ensuring compliance of various provisions of the
company law thereby avoiding penal consequences, this study material has been prepared with a view to
provide an expert knowledge and understanding of the various procedural requirements of Company Law. With
this objective in mind, a number of specimen notices, minutes, resolutions and forms have been included at
relevant places. However, the students are advised to study the various procedures relevant for the purpose of
this paper, in the light of the provisions of the Company Law and Rules made thereunder.

Company Secretaryship being a professional course, the examination standards are set very high, with emphasis
on knowledge of concepts, applications, procedures and case laws, for which sole reliance on the contents of
the study material may not be enough. Besides, Company Secretaries Regulations, 1982 requires the students
to be conversant with the amendments to the laws made upto six months preceding the date of examination.
This study material may therefore be regarded as basic material and must be read alongwith the Bare Act,
Rules, Regulations, Case Law, as well as suggested readings.

The various changes made upto 30th June, 2013 have been included in this study material. However, it may
happen that some developments might have taken place during the printing of the study material and its supply
to the students. The students are therefore advised to refer to the Student Company Secretary, Chartered
Secretary and other publications for updation of study material. In the event of any doubt, students may write to
the Directorate of Academics and Perspective Planning in the Institute for clarification at aclp@icsi.edu and
sudhir.dixit@icsi.edu.

This study material also contains one CD containing the E-forms which is part of the syllabus. E-forms are
updated from time to time by the Ministry of Corporate Affairs (MCA). Hence, the students are advised to visit
the MCA Website i.e. www.mca.gov.in for updated e-forms.

Although due care has been taken in publishing this study material, yet the possibility of errors, omissions and/
or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall
not be responsible for any errors, omission and/or discrepancies or any action taken in that behalf.

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SYLLABUS

MODULE 1-PAPER 1: ADVANCED COMPANY LAW AND PRACTICE (100 Marks)

Level of Knowledge:Expert Knowledge


Objective: To acquire expert knowledge of the practical and procedural aspects of the Companies Act.

Detailed Contents:

1. Company Formation and Conversion


Choice of Form of Business Entity; Conversion/ Re-conversion of One Form of Business Entity into
Another
Incorporation of Private Companies, Public Companies, Companies Limited by Guarantee and Unlimited
Companies and their Conversions/ Re-conversion/Re-registration
Formation of Nidhi Companies, Producer Companies and Mutual Benefit Funds
Commencement of Business and New Business; Pre Incorporation Agreements and Contracts
Formation of Non Profit Companies
Procedure Relating to Foreign Companies Carrying on Business in India
2. Procedure for Alteration of Memorandum and Articles
Alteration of Various Clauses of Memorandum: Name Clause, Situation of Registered Office Clause,
Objects Clause, Capital Clause and Liability Clause
Effects of Alteration of Articles
3. Procedure for Issue of Securities
Part A: Shares
Public Issue, Rights Issue and Bonus Shares, Issue of Shares at Par/Premium/Discount; Issue of
Shares on Preferential /Private Placement Basis
Allotment, Calls on Shares and Issue of Certificates
Issue of Sweat Equity Shares, Employees Stock Option Scheme (ESOPs), Employees Stock Purchase
Scheme (ESPS), Shares with Differential Voting Rights
Issue and Redemption of Preference Shares
Alteration of Share Capital - Forfeiture of Shares and Reissue of Forfeited Shares; Increase,
Consolidation, Conversion and Re-conversion into Stock, Subdivision and Cancellation and Surrender
of Shares
Buy Back of Shares
Reduction of Share Capital
Part B: Debt Instruments
Issue of Debentures and Bonds, Creation of Security and Debenture Redemption Reserve, Drafting of
Debenture Trust Deed, Redemption of Debentures, Conversion of Debentures into Shares

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Deposits
4. Procedure relating to Membership, Transfer and Transmission
Induction of Members, Nomination of Shares, Variation of Shareholders Rights, Cessation of
Membership including Dispute Resolution
Transfer/Transmission/Transposition
Admission of Securities in Electronic Mode
Dematerialization/ Rematerialisation of Securities
Compliances relating to Insider Trading and Takeovers
5. Directors and Managerial Personnel
Obtaining DIN
Directors and Managerial Personnel- Appointment, Reappointment, Resignation, Removal and
Varying Terms of Appointment/Re-appointment
Payment of Remuneration to Directors and Managerial Personnel and Disclosures thereof;
Compensation for Loss of Office
Waiver of Recovery of Remuneration
Making Loans to Directors, Disclosure of Interest by a Director, Holding of Office or Place of Profit by
a Director/Relative
Company Secretary - Appointment, Resignation and Removal
Company Secretary in Practice - Appointment, Resignation and Removal
6. Meetings
Collective Decision Making Forums - Authority, Accountability, Delegation and Responsibility
Board Meetings - Convening and Management of Meetings of Board and Committees; Preparation of
Notices and Agenda Papers
General Meetings - Convening and Management of Statutory Meeting, Annual and Extra-Ordinary
General Meetings, Class Meetings; Creditors Meetings; Preparation of Notices and Agenda Papers;
Procedure for Passing of Resolutions by Postal Ballot; Voting through Electronic Means; Conducting a
Poll and Adjournment of a Meeting
Post-Meeting Formalities - Preparation of Minutes and Dissemination of Information and Decisions
7. Auditors
Auditors - Procedure for Appointment/Re-appointment, Resignation and Removal of Statutory Auditors
and Branch Auditors; Appointment of Cost Auditors
Special Auditors; CAG audit
8. Distribution of Profit
Ascertainment of Distributable Profits and Declaration of Dividend; Payment of Dividend
Claiming of Unclaimed/Unpaid Dividend; Transfer of Unpaid/Unclaimed Dividend to Investor Education
and Protection Fund
9. Procedure relating to Charges

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Creation and Registration, Modification, Satisfaction of Charges
Inspection of charges
10. Procedure relating to Inter-Corporate Loans, Investments, Guarantees and Security
Making Inter-Corporate Loans, Investments, Giving of Guarantee and Security
11. Preparation & Presentation of Reports
Preparation of Financial Statements, Auditors Report, Directors Report and Report on Corporate
Governance
12. E- Filing
Filling and Filing of Returns and Documents
(a) Annual Filing, i.e., Annual Accounts; XBRL Filing, Compliance Certificate, Annual Return
(b) Event Based Filing
13. Striking off Names of Companies
Law and Procedure
14. Recent Trends and Developments in Company Law
15. Trusts and Non Profit Organisation

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LIST OF RECOMMENDED BOOKS
MODULE 1

PAPER 1 : ADVANCED COMPANY LAW AND PRACTICE

The students may refer to the given books and websites for further knowledge and study of the subject :
Readings:
1. M.C. Bhandari : Guide to Company Law Procedures; Wadhwa & Company, Agra & Nagpur
2. K.V. Shanbhogue : Company Law Procedure; Bharat Law House, New Delhi-34
3. M.L. Sharma : Company Law Procedures, Taxmann Publishers, New Delhi.
V.S. Sowrirajan
4. A.M. Chakraborti & : Company Notices, Meetings and Resolutions, Taxmann, New Delhi
B.P. Bhargava
5. A. Ramaiya : Guide to the Companies Act, Wadhwa & Company, Nagpur
6. R. Suryanarayanan : Company Notices, Meetings and Resolutions, Kamal Law House, Kolkata
7. D.K. Jain : E-filing of Forms & Returns, Bharat Law House
8. Taxmann : Guide to E-Company forms
9. V.K. Gaba : Depository Participants (Law & Practice)
10. Dr. K.R. Chandratre : Guide to Company directors
11. ICSI Publication : Meetings
12. B.K. Sengupta : Company Law
13. D.K. Jain : Company Law Procedures, Bharat Law House
14. Taxmann : Company Rules & Forms
References:
1. M.C. Bhandari : Guide to Memorandum, Articles and Incorporation of Companies;
R.D. Makheeja Wadhwa & Company, Agra & Nagpur
2. Taxmann : Company Law, Digest
Journals:
1. Chartered Secretary : ICSI Publication
2. Student Company : ICSI Publication
Secretary
3. Corporate Law Adviser : Corporate Law Advisers, Post Bag No. 3, Vasant Vihar, New Delhi.
4. Company Law Journal : L.M. Sharma, Post Box No. 2693, New Delhi - 110005
Note:
The latest edition of all the books referred to above should be read.

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ARRANGEMENT OF STUDY LESSONS

Study Lesson No. Topic

1. Company formation and conversion

2. Procedure for Alterations of the Memorandum and Articles of Association

3. Issue of Securities
4. Allotment of Securities

5. Alteration of Share Capital

6. Issue and redemption of Debentures and Bonds

7. Acceptance of Deposits by companies

8. Membership and Transfer/Transmission of Shares

9. Directors and Managerial Personnel


10. Company Secretary

11. Meetings

12. Auditors
13. Preparation & Presentation of Reports

14. Distribution of Profit

15. Charges
16. Inter-Corporate Loans, Investments, Guarantees and Security

17. E-Filling

18. Striking off Names of Companies


19. Recent Trends & Developments in Company Law

20. Trusts and Non-Profit Orginisation

TEST PAPERS

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CONTENTS
ADVANCED COMPANY LAW AND PRACTICE
LESSON 1
COMPANY FORMATION AND CONVERSION

Page

Learning Objectives/Lesson Outline 1


Choice of Form of Business Entity 2
Nature, Form and Types of Business Enterprises 2
Non-Corporate Form of Business Enterprises 2
Corporate Form of Business Enterprises 2
Limited Liability Partnership (LLP) 3
Forming a Choice 3
Incorporation of Companies 3
Promoters to take Steps for Formation of the Company 4
Procedure for incorporation of public limited company having share capital 4
Obtain Director Identification Number (DIN) 4
Procedure for incorporation of private limited company having share capital 10
Procedure for incorporation of company limited by guarantee 10
Procedure for incorporation of company for charitable and other public utility purposes
without addition of the words Limited or Private Limited to its name (Non Profit Companies) 14
Procedure for issue of licence under section 25 to a company already registered 16
Procedure for incorporation of a company as subsidiary of an existing company 17
Unlimited Companies 18
Procedure for incorporation of a Producer Company 18
Procedure to Form a Nidhi Company 21
Mutual Benefit Fund 24
Procedure to register a foreign company in India 24
Conversion of companies 25
Re-registration of companies 26
Conversion of private company into public company 26
Status of deemed public company after commencement of Companies (Amendment) Act, 2000 28
Consequences of Non-compliance of Section 3(1)(iii) of the Companies Act, 1956 28

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Page

Conversion of public company into a private company 29


Conversion of Sole Proprietor Concern into Limited Company 31
Conversion of a Partnership Firm into a Limited Company 31
Procedure for Conversion of a Sole Proprietor Concern or Partnership Firm into a Limited Company 32
Conversion of Company into Limited Liability Partnership 33
Conversion of an Inter-State Cooperative Society into a Producer Company 34
Reconversion of Producer Company to Inter-State Co-Operative Society [Section 581ZS] 35
Strike off Name of Producer Company 35
Commencement of business by a company 36
Commencement of new business by an existing company 37
Procedure for Commencement of new business 38
Pre-Incorporation agreements and contracts 40
ANNEXURES 41
LESSON ROUND-UP 51
SELF-TEST QUESTIONS 52

LESSON 2
PROCEDURE FOR ALTERATION OF MEMORANDUM AND ARTICLES

Learning Objectives/Lesson Outline 53


Alteration of Clauses of Memorandum of Association of a Company 54
Change of Name of a Company 54
Effect of change of name of a Company 56
Change of name by rectification 58
Change of Objects of a Company 59
Alteration of Memorandum of Producer Company 59
Procedure for changing objects of a Company 60
Change of Registered Office of a Company 61
Extension of time by Regional Director for filing Documents with Registrar 65
Liability of Directors etc. to be made Unlimited 70
Alteration of Articles of Association of a Company 71
Procedure for Altering Articles of Association 72
Procedure for Alteration of Articles of Producer Company [Section 581 I] 73
Effect of Alteration of Articles 73

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Page

Financial Year of a Company 73


Authority to Determine and alter Financial Year of a Company 74
Procedure for Changing the Financial Year of the Company 74
ANNEXURES 75
LESSON ROUND-UP 84
SELF-TEST QUESTIONS 85

LESSON 3
ISSUE OF SECURITIES

Learning Objectives/Lesson Outline 87


Meaning of Public Issue of Securities 88
Issue of Equity Shares 88
Steps involved in issue of Equity Shares 89
Issue of Shares at Discount 94
Procedure for Issue of Shares at Discount 95
Issue of Shares at a Premium 97
Procedure for Issue of Shares at Premium 97
Making Calls on Shares 99
Procedure to Make Calls on Shares 100
Rights Issue 100
For Non-underwritten Rights Issue 101
For Underwritten Rights Issue 102
Steps involved in issue of Rights Shares 102
Issue of Bonus Shares 105
Steps involved in Issue of Bonus Shares 106
Procedure for bonus issue by an Unlisted Company 108
Procedure to Issue Equity Shares with Differential Voting Rights 108
Issue of Shares on Preferential Basis/Private Placement 111
Lock-in period as per SEBI (ICDR) Guidelines, 2009 113
Employee Stock Options 114
Procedure for issue of securities to employees through Employees Stock Option Scheme or
Employees Stock Purchase Scheme 115
ESOS/ESPS through Trust Route 122

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Page

Sweat Equity Shares 123


Procedure to Issue Sweat Equity Shares (In case of Listed Companies) [Section 79A] 123
Procedure to Issue Sweat Equity Shares (in case of unlisted companies) [Section 79A] 125
Issue and Redemption of Preference Shares 127
Procedure to issue Redeemable Preference Shares under Section 80 128
Procedure to redeem Redeemable Preference Shares 128
ANNEXURES 129
LESSON ROUND-UP 141
SELF-TEST QUESTIONS 142

LESSON 4
ALLOTMENT OF SECURITIES

Learning Objectives/Lesson Outline 145


Meaning of Allotment 146
Allotment of Shares 146
Shares Allotted for Consideration otherwise than in Cash 147
Return of Allotment of Bonus Shares 147
Return of Allotment of Shares Issued at Discount 147
Disposal of Forfeited Shares No Allotment Return to be Filed 147
Return of Allotment to be Filed in Respect of Every Allotment 147
Allotment of Fractional Shares 148
Share Application Form 148
Partial Allotment 148
Time limit for allotment 149
Irregular Allotments 149
Voidable Allotment 149
Void Allotment and its Effects 149
Allotment Procedure 150
Making Calls on Shares 152
Procedure to Make Calls on Shares 153
Issue of Share Certificates 153
Procedure for Issue of Share Certificates 154
Issue of Duplicate Share Certificates 155

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Issue of Share Certificates on Surrender of Letters of Allotment 155


ANNEXURES 156
LESSON ROUND-UP 159
SELF-TEST QUESTIONS 159

LESSON 5
ALTERATION OF SHARE CAPITAL

Learning Objectives/Lesson Outline 161


Alteration of Share Capital of a Company 162
Filing of (e-form 5) notice of change in share capital with ROC 162
Procedure for increasing share capital 163
Procedure for consolidation of share capital 164
Procedure for sub-division of share capital 165
Conversion of Shares into Stock 166
Procedure for Conversion of Fully Paid Shares into Stock 167
Effect of conversion of shares into stock 168
Procedure for Re-conversion of Stock into Fully Paid Shares 169
Forfeiture of Shares 169
Notice for Payment of Call on Defaulting Members 169
Effect of forfeiture 169
Procedure for forfeiture of shares 170
Sale, etc. of Forfeited Shares 171
Cancellation of Shares 171
Procedure for Cancellation of Shares 171
Surrender of Shares 173
Reduction of Share Capital 174
Procedure for reduction of share capital 175
ANNEXURES 179
LESSON ROUND-UP 187
SELF-TEST QUESTIONS 187

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Page

LESSON 6
ISSUE AND REDEMPTION OF DEBENTURES AND BONDS

Learning Objectives/Lesson Outline 189


Debentures 190
Kinds of Debentures 191
Debenture Trust Deed and its Drafting 192
Contents of a debenture trust deed 193
Execution of trust deed and stamp duty 195
Appointment and Duties of Debenture Trustees 196
Liability of Company to Create Security a Debenture Redemption Reserve 197
Debenture Redemption Reserve (DRR) 197
Issue of Debentures 198
SEBI Guidelines pertaining to Issue of debt securities 199
Role of Company Secretary under Listing Agreement for Debt Securities 204
Redemption and roll-over 204
Re-issue of redeemed debentures 205
Important aspects under SEBI (Issue and Listing of Debt Securities) Regulations, 2008 205
Obligations of Intermediaries and Issuers 205
Obligations of Debenture trustee 205
Obligations of the Issuer, Lead Merchant Banker, etc. 206
Power of SEBI to undertake inspection and to issue directions 206
Issue of Convertible Debt Instruments 207
Private Placement of Debt Securities 209
SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 212
Procedure for issue of shares on conversion of debentures or loans into shares 213
Conversion into Preference Shares 214
Issue of Public Sector Bonds 214
Issue of Bonus Bonds 215
ANNEXURES 216
LESSON ROUND-UP 249
SELF-TEST QUESTIONS 250

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Page

LESSON 7
ACCEPTANCE OF DEPOSITS BY COMPANIES

Learning Objectives/Lesson Outline 251


Meaning of Deposit 252
Procedure to invite deposits by a non-banking non financial company 252
Power to grant extension of time or exemption under Section 58A(8) of the Act 256
Procedure to obtain an order of the Central Government for extension of time or exemption
under section 58A(8) of the Act 256
Procedure for accepting deposits by private placements and confidential offers 257
Procedure for making complaint to the Company Law Board against failure by the company
to repay deposit 259
ANNEXURES 260
LESSON ROUND-UP 271
SELF-TEST QUESTIONS 272

LESSON 8
MEMBERSHIP AND TRANSFER/TRANSMISSION OF SHARES

Learning Objectives/Lesson Outline 273


Who are Members 274
Definition of Member 274
Modes of Acquiring Membership 275
Membership and Voting Rights of Producer Company 277
Procedure for Cessation of Membership 278
Dispute Regarding Title of Shares and its Resolution 283
Rectification of Register of Members or Register of Debentureholders 283
Procedure for obtaining a Direction from the CLB for the Rectification of the Register
of Members or Debentureholders 283
Expulsion of a Member 285
Procedure for Variation as well as Cancellation of the Variation of Members Rights 285
Transfer of shares of a company 288
Transfer of shares of a Private Limited Company 290
Transferability of Shares of Producer Company 290
Procedure for Registration of Transfer of Shares 290

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Page

Registration of Partly-Paid Shares 290


Checklist for Share Transfers 292
Forged Transfers 294
Post Approval Processing 294
Transfer of Debentures 295
Transfer of Share Warrants 295
Certification of Transfer 295
Transposition of Names 295
Death of Transferor or Transferee before Registration of Transfer 296
Registration of Transmission of Shares 296
Nomination of Shares 297
Procedure for Transmission of Shares (in case nomination by member was not made) 298
Procedure for Transmission of Shares to Nominee 300
Transfer and Transmission of Debentures 300
Secretarial Standard on Transmission of Shares and Debentures (SS-6) 300
Dematerialisation of Shares of a Company 302
Admission of Securities in Electronic Form 302
Procedure for a Shareholder to get his Shares Dematerialised 303
Procedure for a Company to have its Shares Dematerialised 303
Transfer of Shares Held in Dematerialized Form 305
Pledge or Hypothecation of Shares Held in a Depository 306
Transfer-cum-Demat Scheme 306
Phasing out of Transfer-cum-Demat Scheme 306
Procedure for Rematerialisation 306
Certain Compliances and Disclosures Relating to Insider Trading and Takeovers with
regard to Transfer of Securities 307
Concept of Insider Trading 307
Certain Important Expressions used in the Regulations 308
Restrictions with Respect to Execution by Directors/Officers etc. 310
Requirement of Compliances by the Company 310
Requirement of Compliances by Persons other than the Company 311
Role of Company Secretary in Compliance Requirements 312
Compliances Relating to Takeovers 315

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Page

Role of the Target Company in the Open Offer Process 316


Exemption from Making Open Offer 316
Disclosures (Other than the ones given in Public Announcement/Detailed Public Statement/ Letter
of Offer for the Open Offer) required to be made in terms of SAST Regulations, 2011 317
ANNEXURES 318
LESSON ROUND-UP 348
SELF TEST QUESTIONS 348

LESSON 9
DIRECTORS AND MANAGERIAL PERSONNEL

Learning Objectives/Lesson Outline 351


Directors 352
Maximum/Minimum Number of Directors in a Company 352
Procedure for Appointment of Directors in a Company 352
Appointment of First Directors 352
Appointment of First Directors in Producer Company 353
Appointment of Directors by Members at General Meeting 353
Obtaining DIN 354
Cancellation or Deactivation of DIN 355
Appointment of a Person other than Retiring Director 356
Appointment of Directors by Board 357
Appointment of additional directors of Producer Company 358
Procedure for Appointment of Additional Director 358
Procedure for Appointing Directors in Casual Vacancy 359
Procedure for Appointment of an Alternate Director 360
Appointment of Directors by Central Government 360
Appointment of Director by System of Proportional Representation 361
Appointment of Nominee Directors 361
Procedure for Appointment of Director to be Elected by Small Shareholders 362
Procedure for Reduction in Number of Directors 363
Procedure for Increase in Number of Directors 364
Removal of Directors 365
Removal of Director by Shareholders 365

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Page

Procedure for Removal of Director 365


Procedure for filling the vacancy caused by removal of a director 366
Removal of Director by Central Government 367
Removal of Director by Company Law Board 367
Vacation of Office by a Director 367
Vacation of office by Directors in case of Producer Company 368
Managing Director 369
Appointment of Managing Director 369
Procedure for Managing Directors Appointment 370
Appointment of a Person as Managing Director, who is Managing Director of Another Company 372
Appointment of Managing Director/whole-time Director/Manager of a Private Company
which is not a Subsidiary of a Public Company 372
Variation of Provisions Regarding Appointment or Reappointment of
Managing Director/Whole-time Director/Non-Rotational Director 372
Procedure for Varying the Terms of Appointment of Non-rotational Directors 373
Remuneration of Managing Director/Whole-Time Director 373
Procedure for Fixation of Remuneration to Managing Director/Whole-time Director/Manager 374
Procedure for Payment of Remuneration to Part-time Directors 376
Revision of Remuneration of Managing Director/Whole-time Director 377
Procedure for Revision of Remuneration of Managing Director 377
Provisions Applicable to Managerial Remuneration 378
Waiver of Recovery of Remuneration 380
Procedure for Removal of Managing Director/Whole-Time Director before the expiry of his term of Office 380
Resignation by Managing Director 380
Whole-time Director 380
Appointment of Whole-time Director 381
Procedure for Appointment of Whole-Time Director 381
Resignation by Whole-time Director 383
Remuneration of Whole-time Director 383
Variation of Provisions Regarding Whole-time Director 383
Procedure for Loans to Directors 383
Procedure for Entering in Contracts in which Directors are Interested 384
Disclosure of Interests by a Director 385

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Page

Procedure for disclosure of interests by a director 386


Procedure for a Director or Persons related to a Director to hold an Office or Place of Profit 386
Manager 388
Appointment of Manager 388
Provisions Applicable to Manager 389
Procedure for Appointment of a Manager 389
Removal of a Manager 391
Compensation for Loss of Office of Director and other Managerial Personnel 391
Payment to a Director etc. for loss of office etc. in connection with transfer of undertaking or property 392
Directors and Officers Liability Insurance 393
Indian Scenario 395
Recent Development in Asia Affecting D&O 395
Filing of Agreements with Managerial Personnel 395
ANNEXURES 396
LESSON ROUND-UP 417
SELF-TEST QUESTIONS 418

LESSON 10
COMPANY SECRETARY

Learning Objectives/Lesson Outline 419


Who can be a Company Secretary 420
Functions of a Company Secretary An Officer of Company 420
Relationship with the Board, Chairman and Managing Director 422
Relationship with other Functionaries 422
Appointment of a Company Secretary 425
Penalty for Default 427
Appointment of Secretary of Producer Company 427
Procedure for Appointment of a Company Secretary 427
Removal of a Company Secretary 428
Procedure for Removal/Resignation of a Company Secretary 428
Appointment as Compliance Officer 429
Company Secretary in Practice 429
Permissions granted by general or specific resolution of the Council under Regulation 168 of
Company Secretaries Regulations, 1982 431

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Appointment of a Company Secretary in Whole-time Practice 434


Issue of Compliance Certificate 434
Procedure for Appointment of Company Secretary in Whole-time Practice for
Issue of Compliance Certificate 435
Penalty for non-compliance 436
Signing of Annual Return 436
Certification under Listing Agreement 436
Removal of Company Secretary in Practice 436
Functions of Company Secretary in Practice 436
Designation to be used by Members in Practice 441
Prefix of CS 441
Logo for Members 442
ANNEXURES 442
LESSON ROUND-UP 445
SELF-TEST QUESTIONS 446

LESSON 11
MEETINGS

Learning Objectives/Lesson Outline 447


Collective Decision Making Forums 448
Division of Powers between Shareholders and Directors 448
Responsibility and Accountability 449
Delegation of Powers 449
Powers to be exercised only at Board Meetings 449
Meetings 451
Board Meetings 451
Procedure for holding first meeting of The Board of Directors 452
Procedure for Holding Subsequent Board Meetings 454
Meetings of Committee of Directors 454
Committee of Directors of Producer Companies 455
Audit Committee 455
Preparation of Notices and Agenda Papers for Meetings of Board/Committees of Board 456
Secretarial Standard on Meetings of the Board of Directors (SS-1) 457

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Procedure for Passing a Board Resolution by Circulation 459


Secretarial Standard on Passing of Resolutions by Circulation (SS-7) 460
Participation of Directors in Meetings of Board/Committee of Directors through Electronic Mode 461
Procedure for Holding Statutory Meeting 462
Procedure for Holding an Annual General Meeting 463
Secretarial Standard on General Meetings (SS-2) 468
Conduct of Poll 469
Procedure for Passing of Resolutions By Postal Ballot 470
Items of business to be transacted through postal ballot 471
Procedure 472
Voting through Electronic Means in General Meetings 477
Adjournment of a Meeting 479
Annual General Meeting of Producer Company 480
Matters to be Transacted at General Meeting 481
Procedure for Holding an Extraordinary General Meeting 481
Procedure for Class Meetings 483
Practical Aspects of Drafting Resolutions and Minutes 484
Resolutions 484
Minutes 485
Minutes of Narration 485
Minutes of Resolution 485
Secretarial Standard on Minutes (SS-5) 485
Matters Requiring Sanction by Ordinary Resolution (Unless otherwise specified in the
Articles of Association) 487
Matters Requiring Special Resolution 488
Matters Requiring Special Notice 489
ANNEXURES 490
LESSON ROUND-UP 567
SELF-TEST QUESTIONS 568

LESSON 12
AUDITORS

Learning Objectives/Lesson Outline 571

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Page

Appointment of Statutory Auditors 572


Appointment of First Auditors 572
Procedure where the first auditor is not appointed by the Board 573
Subsequent Appointment of Auditors 573
Re-appointment of Auditors 574
Procedure relating to Re-appointment of Retiring Auditor at the Annual General Meeting 574
Appointment of Auditor other than a Retiring Auditor (Section 225) 575
Procedure for Appointing an Auditor who is not the Retiring Auditor 575
Appointment of Auditors by Special Resolution 576
Filling of Casual Vacancy [Section 224(6)] 576
Procedure in Regard to Appointment of an Auditor in Casual Vacancy 576
Procedure in Regard to Appointment of an Auditor in Casual Vacancy Caused Due to Resignation 577
Internal Audit of Producer Company 577
Power of Central Government to Appoint Auditors 577
Remuneration of Auditors 577
Removal of Auditors 578
First Auditors 578
Subsequent Auditors 578
Procedure for Removal of an Auditor Before the Expiry of the Term 578
Branch Auditor 579
Exemption to Branch Office from applicability of Section 228 580
Revocation of exemption 581
Removal of Branch Auditor 581
Statutory Auditor vis-a-vis Branch Auditor 581
Intimation to the Registrar of Companies 581
Cost Auditor 582
Appointment of Cost Auditor 582
Statutory Auditor not to be Appointed as Cost Auditor 583
Procedure for Appointment of Cost Auditor 583
Report of Cost Auditor 584
Special Auditors 584
CAG Audit and Procedure for Appointment of Auditors of Government Companies [Section 619] 585
CAG Audit 585

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ANNEXURES 587
LESSON ROUND-UP 589
SELF-TEST QUESTIONS 590

LESSON 13
PREPARATION AND PRESENTATION OF REPORTS

Learning Objectives/Lesson Outline 591


Introduction 592
E-filing 592
Annual Accounts 592
Annual Accounts of Producer Company 593
Procedure for Preparation, Finalisation of Balance Sheet and Profit and Loss Account 593
Procedure for Exemption from Attaching the Accounts of Subsidiary Companies 596
Procedure for Preparing Abridged Balance Sheet and Profit and Loss Account by aListed Company 598
Auditors Report 598
Directors Report 599
Report on Corporate Governance under Clause 49 of the Listing Agreement 600
Form for voluntary reporting of Corporate Social Responsibility (CSR) 601
Management Discussion and Analysis Report (MDAR) 601
Directors Responsibility Statement 601
Disclosure of Information about each Director 602
Declaration from Independent Directors 602
Particulars of Employees 602
Procedure for Preparation of Directors Report 603
Secretarial Standard on Boards Report (SS-10) 605
Compliance Certificate under Section 383A 606
Chairpersons Statement 608
General pointers for preparing a speech for the Chairperson 608
ANNEXURES 609
LESSON ROUND-UP 642
SELF-TEST QUESTIONS 643

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LESSON 14
DISTRIBUTION OF PROFIT

Learning Objectives/Lesson Outline 645


Meaning of Dividend 646
Declaration of Dividend 646
Procedure for Declaration and Payment of Interim Dividend 648
Procedure for Declaration and Payment of Final Dividend 652
Payment of Dividend without Providing for Depreciation 655
Procedure for Declaration of Dividend out of Companys Reserves 656
Claiming of Unclaimed/Unpaid Dividend 657
Procedure for Transfer of Unpaid or Unclaimed Dividend to the Investor Education and Protection Fund 658
Secretarial Standard on Dividend (SS-3) 659
ANNEXURES 661
LESSON ROUND-UP 664
SELF-TEST QUESTIONS 665

LESSON 15
CHARGES

Learning Objectives/Lesson Outline 667


What is a Charge 668
Charge as defined in Transfer of Property Act, 1882 668
What is a Mortgage? 668
Mortgage as defined in Transfer of Property Act, 1882 668
Charge and Mortgage Distinguished 668
Charge and Pledge Distinguished 669
Need for Creating a Charge on Companys Assets 669
E-Filing 669
Register of Charges Maintained in RoCs Office 670
Register of Charges under the E-governance Regime 670
Inspection of Particulars of Charges 670
Registration of Particulars of Charges 670
Registrable Charges 671

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Notice of Charge 671


Consequences of Non-Registration of Charge 671
Registration of Charges on Properties Acquired Subject to Charge 672
Particulars of Charge in Case of Series of Debentures 672
Particulars in case of Commission, etc. on debentures 673
RoC Empowered To Grant Extention of Time for Filing Particulars 673
Any Interested Party may File Particulars of Charge with RoC 673
Particulars of Charges 673
Index to Register of Charges 674
Procedure for Registration of a Charge 674
Rectification by Central Government of Register Of Charges 675
Procedure for Petition to Regional Director for Rectification of RoCs Register of Charges 676
Register of Charges to be Maintained by Companies 677
Companies to keep at Registered Office copies of instruments creating charges 678
Inspection of Charges 678
Inspection in electronic mode 678
Modification of Charge 678
Procedure for Modification of Existing Charge 679
Satisfaction of a Charge 680
Procedure for Satisfaction of a Registered Charge 680
ANNEXURES 681
LESSON ROUND-UP 688
SELF-TEST QUESTIONS 688

LESSON 16
INTER-CORPORATE LOANS, INVESTMENTS, GUARANTEES AND SECURITY

Learning Objectives/Lesson Outline 691


Introduction 692
Procedure for Inter-Corporate Loans/Investment/Giving Guarantee/Providing Security 694
Loan to Members of Producer Company 696
Investment in other companies, formation of subsidiaries etc., in case of producer company 697
ANNEXURES 698
LESSON ROUND-UP 702
SELF-TEST QUESTIONS 702

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LESSON 17
E-FILING

Learning Objectives/Lesson Outline 705


E-Governance and MCA-21 706
Scope of E-Governance 706
Operational Aspects of MCA-21 706
Launch of MCA-21 706
Notification of e-forms 706
E-forms 707
Companies (Electronic Filing and Authentication of Documents) Rules, 2006 707
Director Identification Number (DIN) 707
Corporate Identity Number (CIN) 708
Global Location Number (GLN) 708
Digital Signature Certificate (DSC) 708
Front Office and Back Office 709
Back Office 709
Service Request Number (SRN) 709
Rectification of Mistakes 710
Payment of Stamp Duty 710
Introduction of e-stamping facility by MCA and dispensation of physical submission thereof 710
STP Forms 711
Regulation 17 of Companies Regulation, 1956 711
For Non-STP documents 711
For STP Documents 712
Online Inspection of Documents 712
Clarifications Issued by MCA From time to time 712
Frequently Asked Questions on MCA-21 712
Substantial benefits of MCA-21 713
Elimination of Interface with the Offices of ROCs, RDs and the MCA 713
Effective use of Database 713
Better Supervision and Monitoring of Compliance 714
Mutually Beneficial System 714
Speed, Transparency and Efficiency 714

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Effective Due Diligence 714


Efficient Services by Professionals 714
Environment Friendly 714
Filling and Filing of Forms 714
Scope of Filing E-forms 715
Adequate knowledge of Substantive Laws 715
Prerequisites for E-filing on MCA-21 715
Important terms used in E-filing 716
Pre-fill 716
Attachment 716
Modify 716
Radio Button 716
Check Box 716
Drop Down Box 716
Text box 716
Country Code 716
Stock Exchange Code 717
Check Form 717
Pre-Scrutiny 717
How to Affix Digital Signature? 717
Submit 717
Addendum to E-Form 717
Re-submission of an E-Form 718
Steps for E-Form re-submission 718
Pre-certification of certain E-Forms 718
Necessity of Pre-certification 719
Guidelines for Filling and Filing E-Forms 719
Flowchart of E-filing 720
Important aspects to be considered at the time of Annual Filing 721
XBRL Filing 722
Steps for filing Financial Statements in XBRL mode 722
Common Points for all the annual e-Forms 723
E-Form 23AC 724

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E-Form 23ACA 725


E-Form 23AC-XBRL 726
E-Form 23ACA-XBRL 727
E-Form 20B 728
E-Form 21A 729
E-Form 66 731
Important aspects to be considered at the time of E-Filing of Forms (event based filing) 732
E-Form 1 732
E-Form 1A 733
E-Form 1AA 734
E-Form 1AD 734
E-Form 1B 735
E-Form 2 736
E-Form 3 736
E-Form 4 737
E-Form 4C 738
E-Form 5 739
E-Form 8 739
E-Form 10 741
E-Form 17 742
E-Form 18 742
E-Form 19 743
E-Form 20 744
E-Form 20A 745
E-Form 21 745
E-Form 22 746
E-Form 23 747
E-Form 23AA 748
E-Form 23AAA 748
E-Form 23AAB 749
E-Form 23AAC 750
E-Form 23B 751
E-Form 23C 751

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E-Form 24 752
E-Form 24A 753
E-Form 24AAA 754
E-Form 24AB 755
E-Form 24B 757
E-Form 25A 758
E-Form 25B 760
E-Form 25C 761
E-Form 32 761
E-Form 37 762
E-Form 39 762
E-Form 44 763
E-Form 61 764
E-Form 62 765
E-Form 65 765
E-Form 66 766
E-Form 67 766
E-Form 68 767
Pre-Requisites for Uploading an E-Form 768
Defective Forms/Documents 771
Penalty for Filing False Documents/Statements with the Registrar 771
Mode of Payment of Fees 771
Off-line Method of Payment of Fees 772
Online Method of Payment of Fees 772
Credit Card Payment Process 772
Internet Banking Payment Process 772
Online Payments Using NEFT 773
Condonation of Delay 774
Procedure for Condonation of Delay by Central Government in Relation to Filing of
Documents with Registrar of Companies 774
ANNEXURES 774
LESSON ROUND-UP 800
SELF-TEST QUESTIONS 801

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LESSON 18
STRIKING OFF NAMES OF COMPANIES

Learning Objectives/Lesson Outline 803


Introduction 804
Meaning of Defunct Company 804
Important Provisions of Law on Striking Off 804
Power of Registrar to Strike off Names of Defunct Companies 804
Position of Companys Creditors after Striking Off 805
Courts Power to Wind Up the Company even after Dissolution Under Section 560(5) 805
Restoration of Company within 20 years 805
Procedure Involved in Striking Off Names of Companies by Registrar Under Section 560 806
The Rights of Person Aggrieved by the Company having been Struck Off the Register [Section 560(6)] 807
Effect of Restoration 808
Relevant Case Laws on Striking Off/Restoration of Name 809
Guidelines for Fast Track Exit Mode for Defunct Companies Under Section 560 of
the Companies Act, 1956 809
ANNEXURES 810
LESSON ROUND-UP 818
SELF-TEST QUESTIONS 818

LESSON 19
RECENT TRENDS AND DEVELOPMENTS IN COMPANY LAW

Learning Objectives/Lesson Outline 821


The Extension of Corporate Activity Beyond National Frontiers 822
Growth of Multinationals and Transnationals 822
Regulation of Multinationals 823
Modernization of Company Law for Global Competitiveness 823
Distinguishing Features of Company Law in Various Countries 824
United Kingdom (U.K.) 824
Salient features of Company Law in U.K. (Companies Act, 2006) 824
The United States of America (USA) 833
Salient features of RMBCA of U.S. Corporations 834
Australia 840
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Salient features of Australian Corporations Act 841


Canada 844
Salient features of Canada Business Corporations Act 845
Hongkong 853
Salient features of Hong Kong Companies Ordinance 854
Singapore 866
Salient Features of Singapore Companies Act 866
India 870
Dr. J J Irani Committee Report 871
New Concepts introduced by Dr. J J Irani Committee in its report 871
The Companies Bill, 2012 (India) 879
Highlights of the Companies Bill, 2012 880
Salient and unique features of the Bill 880
End Note 896
LESSON ROUND-UP 897
SELF-TEST QUESTIONS 897

LESSON 20
TRUSTS AND NON PROFIT ORGINISATION

Learning Objectives/Lesson Outline 899


Introduction 900
Advantages of Registration 900
Trusts 900
Definition of Trust 900
Classification of Trusts 901
Simple and Special Trusts 901
Oral and Written Trusts 901
Charitable or Religious Trust 901
Express and Implied Trusts 901
Public and Private Trusts 901
Revocable and Irrevocable Trusts 901
Public-cum-Private Trust 902
Constructive Trust 902

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Resulting Trust 902


Executed and Executory Trust 902
Procedure of Registration of a Trust 902
Extinction of a Trust 902
Revocation of a Trust 903
Societies 903
Registration 903
Points to be kept in mind while forming a society 904
Procedure for Registration 904
Rules & Regulations 904
Society may make bye-laws 905
Working and Management of Society 906
Dissolution of Society 907
Consequences of Dissolution 909
Non Profit Organisation under Section 25 of the Companies Act, 1956 909
Procedure for Incorporation under Section 25 of the Companies Act, 1956 909
Privileges and Exemptions of Non-Profit Organisations registered under Section 25 911
LESSON ROUND-UP 912
SELF-TEST QUESTIONS 912

TEST PAPERS 2013


Test Papers 1/2013 917
Test Papers 2/2013 920
Test Papers 3/2013 923

xxxii
Lesson 1 Company Formation and Conversion 1

Lesson 1
Company Formation and Conversion

LESSON OUTLINE
LEARNING OBJECTIVES
Choice of form of business entity
Starting a company requires a lot of planning
Procedure for Incorporation of companies and activities and more than that there are a
number of formalities which need to be complied
Procedure for Conversion of Companies
with. Detailed procedures and paper works are
Procedure for Commencement of involved in order to start or to register a company
business in India. Registrar of Companies appointed by
the Ministry of Corporate Affairs, is vested with
Procedure for ratification of pre- the primary duty of registering companies.
incorporation agreements and contracts
Ministry of Corporate Affairs (MCA) has started
LESSON ROUND UP the process of filing or uploading of forms
completely online together with the attachment
SELF TEST QUESTIONS of required documents to the Registrar of
Companies for initiating the Incorporation
Process as a part of its MCA21 e-Governance
Project.

After completion of this lesson, students will be


well-acquainted with practical and procedural
aspects of company formation and conversion
which include pre-registration requirements,
name approval, acquiring digital signatures,
preparation and submission of various e- forms
and documents, stamping of memorandum and
articles of association, payment of stamp duty,
payment of registration fees, obtaining certificate
of incorporation, compliance requirements
relating to conversion of companies, conversion
of other entities into companies etc. Students
will also be able to understand the procedural
aspects relating to commencement of business
and ratification of pre-incorporation contracts.

1
2 PP-ACL&P

1. CHOICE OF FORM OF BUSINESS ENTITY


Selection of the form of business entity is one of the most important decisions before starting a business. This
decision is required to be revisited periodically as the business develops. A business entity may exercise the
options for conversion and re-conversion, as and when it seems appropriate. The choice amongst the various
forms of business entities depends upon many aspects such as objects of the proposed business, likely number
of members, amount to be invested, scale of operations, state control, legal requirements, tax implications,
advantages of one form of business over another, etc.

Nature, Form and Types of Business Enterprises


Business enterprises can be broadly divided into two broad categories, namely, one which is non-corporate in
form and the other which has a corporate character. Enterprises which fall in the former category are sole
proprietorship, partnership and Hindu Undivided Family. Business organisation which comprises the latter category
are companies and co-operative undertakings. The basic difference between the corporate and the non-corporate
form of organisation is that while a non-corporate form of business can be started without registration, corporate
bodies cannot be set up without registration under the laws which govern their functioning.

Non-Corporate Form of Business Enterprises


(1) Sole proprietorship: In this form of business organisation, an individual normally uses his own capital, skill
and intelligence to carry out some business activity. He is entitled to receive all the profits and gains of his
business and also assumes all the risk of ownership. The sole proprietor exercises full control over the affairs of
his business. As there is no legal obligation to supply any information regarding his business to anyone, he can
maintain maximum secrecy in conducting his business affairs. This type of organisation is particularly suitable
for businesses which are small in size and where risk and capital involved are not very large.
(2) Joint Hindu Family/Hindu Undivided Family: In this form of business ownership, the business is generally
managed by the father or some other senior member of the family called the Karta or the manager. Karta is
basically the senior most male member of the family. The joint Hindu family firm comes into existence by the
operation of Hindu Law and not by any contract.
(3) Partnership: In this form of organisation, few like-minded persons pool up their resources to form a partnership
firm. Section 4 of the Partnership Act, 1932, defines partnership as The relation between persons who have
agreed to share the profits of a business carried on by all or any of them acting for all. This definition chiefly
brings out the following features of partnership:
(i) Contractual Relationship:- Since partnership arises out of agreement between persons, only those
persons who are competent to contract can be partners.
(ii) Existence of business:- There can be no partnership without business. The persons who have agreed
to become partners must carry out some business activity.
(iii) Sharing of profits:- The agreement to carry on business must be entered into, with the object of
making a profit and sharing it among all the partners.
(iv) Mutual agency:- The business must be carried on by all the partners or by any one or more of them
acting for all the partners. Thus each partner is both an agent and a principal for all other partners.
Partnership is an ideal form of organisation for medium scale business operations which require greater amount
of capital and risks than sole proprietorship or Hindu Undivided Family.

Corporate Form of Business Enterprises


(1) The Co-operative Organisation: Co-operative organisation is a voluntary association with unrestricted
Lesson 1 Company Formation and Conversion 3

membership and collectively owned funds, organised on democratic principle of equality by persons of moderate
means and incomes, who join together to supply their needs and wants through mutual action, in which the
motive of production and distribution is service rather than profit. Besides being a form of ownership co-operative
organisations are a means of protecting the interests of the relatively weaker sections of society against exploitation
by big businesses operating for the maximisation of profits. The basic feature which differentiates the co-operative
organisation from other form of business enterprises is that its primary motive is service to the members rather
than making profits. A co-operative society is required to be registered under the Co-operative Societies Act,
1912. The co-operative societies receive a number of special concessions from the law and the Government, in
order to encourage healthy development of Co-operatives.
By virtue of Companies (Amendment) Act, 2002 effective from 6th February, 2003, a new Part IXA has been
added to the Companies Act, 1956 in connection with Producer Companies, the incorporation of which has
now become possible under the provisions of the Act. This part of the Act deals with the corporatisation of co-
operative societies.
(2) Company: This type of organisation is characterised by the fact that ownership and management are separate.
The capital of the company is provided by a group of people called shareholders who entrust the management
of the company in the hands of persons known as the Board of directors. A company is an artificial legal person
created by process of law which makes it an entity separate and distinct from its members who constitute it. As
a natural consequence of incorporation and transferability of shares, the company has perpetual succession.
Thus, it can be said that this form of organisation is suitable when the capital requirements of a business are
large, the liability of members is expected to be limited and the risks need to be spread among a larger number
of persons.

Limited Liability Partnership (LLP)


LLP is an alternative business vehicle that gives the benefits of limited liability company and flexibility of a
partnership firm. Since, LLP contains elements of both a corporate structure as well as partnership firm structure;
it is many a times termed as a hybrid of a company and a partnership. LLP is a separate legal entity which can
continue its existence irrespective of changes in its partners. LLP is an incorporated partnership formed and
registered under the Limited Liability Partnership Act, 2008.
Owing to flexibility in its structure and operation, LLP is useful for small and medium enterprises, in general, and
for the enterprises in services sector, in particular. LLP is also very suitable for professionals like company
secretaries, chartered accountants, cost accountants, advocates etc. as it helps them to form multi disciplinary
limited liability partnership firms.

Forming a choice
Though there are some similarities between a limited company and other forms of associations, there are a great
number of dissimilarities as well. In both the cases individuals are the subjects, and pursuit of business activity is
generally the object. Distinction between a limited company and a partnership firm, limited liability partnership, a
Hindu Joint family business and a registered society has been discussed in detail in the study of Company Law of
Module I of Executive Programme. Taking into account the requirement in each case and all the aspects of the
various forms of business entities, the decision on the right type of business entity should be taken.

2. INCORPORATION OF COMPANIES
A company is an association of both natural and artificial persons incorporated under the existing law of a
country. In terms of the Companies Act, a company means a company formed and registered under the
Companies Act, 1956 (the Act) or under any of the previous laws relating to companies [Section 3(1) (i) & (ii)].
In common law, a company is a legal person or legal entity separate from, and capable of surviving beyond
the lives of its members.
4 PP-ACL&P

Any seven or more persons, or where the company to be formed will be a private company, any two or more
persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association
and otherwise complying with the requirements of the Companies Act, 1956, in respect of registration, form an
incorporated company, with or without limited liability [Section 12].
Thus, Section 12 stipulates the existence of the following ingredients for the incorporation of a company:
(i) Promoters of the company at least seven in the case of a public company and at least two in the case
of a private company;
(ii) Lawful purpose for which they should associate themselves;
(iii) Promoters must subscribe their names to the memorandum of association of the company;
(iv) Promoters must comply with the requirements of the Companies Act, 1956 in respect of registration of
the company.
The minimum paid-up capital must be rupees one lakh in case of a private company and rupees five lakh in case
of a public company. The Central Government is empowered to prescribe a higher paid-up capital.
Registrar of Companies (ROC) appointed under Section 609 of the Companies Act, 1956 by the Ministry of
Corporate Affairs (MCA), is vested with the primary duty of registering companies and of ensuring that such
companies comply with the statutory requirements of the Act. A company shall be registered with the ROC of the
state under whose jurisdiction the proposed companys registered office will be situated.

Promoters to take steps for formation of the Company


Promoters are the persons, who conceive the idea or visualise a project and then take steps to transform the
idea into a reality. They convey their idea to friends, relatives or business associates, make arrangements for
collecting equity and loan capital for the company, prepare a team of persons who would act as its directors and
take all other steps for compliancewith the requirements of the Companies Act, 1956 in respect of registration
of the company.
The Companies Act does not define the expression promoter. This is because the term does not have any
legal connotation but contains a business element. Promotion is a term of wide import denoting the preliminary
steps taken for the purpose of registration and floatation of the company. The persons who assume the task of
promotion are called promoters. A promoter may be an individual, association, partner or company.
The word promoter is referred to in sub-section (6) of section 62 of the Act. However, it is restricted to and is
meant only for the purposes of a prospectus. It states that the expression promoter means a promoter who was
a party to the preparation of the prospectus or of the portion thereof containing the untrue statement, but does
not include any person by reason of his acting in a professional capacity for persons engaged in procuring the
formation of the company.

3. PROCEDURE FOR INCORPORATION OF PUBLIC LIMITED COMPANY HAVING SHARE


CAPITAL
The following procedural steps are required to be taken by the promoters for the incorporation of a public limited
company:

(1) Obtain Director Identification Number (DIN)


It is important to note that every person who is to be appointed as a director must have Directors Identification
Number (DIN). If the proposed director does not already have a DIN, he/she must obtain the same before
incorporation of the company. This can be obtained by making an application on the MCA portal in form
DIN-1.
Lesson 1 Company Formation and Conversion 5

(2) Acquire Digital Signature Certificate (DSC)


The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in
electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the
only secure and authentic way that a document can be submitted electronically. As such, all filings done by the
companies under MCA21 e-Governance programme are required to be filed with the use of Digital Signatures
by the person authorised to sign the documents.
Acquire DSC - A licensed Certifying Authority (CA) issues the digital signature. Certifying Authority (CA) means
a person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian
Information Technology Act, 2000.
Register DSC - Role check for Indian companies is to be implemented in the MCA application. Role check can
be performed only after the signatories have registered their Digital signature certificates (DSC) with MCA.

(3) Proposing the name of the Company and ascertaining its availability from the ROC
Promoters are required to propose not more than six names for the proposed company and secure the name
availability by making an application to the Registrar of Companies of the State in which they want to have the
proposed company incorporated. The application is required to be made in e-form 1A as prescribed in the
Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006, for the purpose,
along with the prescribed application fee of ` 1000/-. (For specimen of e-form No. 1A, application form for
availability or change of name, please refer the CD provided along with the Study Material or see the link http:/
/www.mca.gov.in/MCA21/Download_eForm_choose.html ).
While applying for a name in the prescribed e-form-1A, using Digital Signature Certificate (DSC), the applicant
shall be required to verify that:
(i) he is a promoter (proposed first subscriber to the MoA) and is authorised by the other proposed first
subscribers to sign and submit the application
(ii) he has used the search facilities available on the portal of the Ministry of Corporate Affairs (MCA) i.e.,
www.mca.gov.in/MCA21 for checking the resemblance of the proposed name(s) with the companies
and Limited Liability Partnerships (LLPs) respectively already registered or the names already approved.
(iii) the proposed name(s) is/are not in violation of the provisions of Emblems and Names (Prevention of
Improper Use) Act, 1950 as amended from time to time;
(iv) the proposed name(s) is not such that its use by the company will constitute an offence under any law
for the time being in force.
(v) the proposed name is not offensive to any section of people, e.g., proposed name does not contain
profanity or words or phrases that are generally considered a slur against an ethnic group, religion,
gender or heredity;
(vi) he has gone through the provisions of the Companies Act, 1956, the rules and prescribed guidelines
framed there under in respect of availability of name, understood the meaning thereof and the proposed
name(s) is/are in conformity thereof
(vii) he has complied with all the mandated requirements of the respective Act/regulator, such as IRDA, RBI,
SEBI, MCA etc. (applicable only in case proposed name includes words like Insurance, Bank, Stock
Exchange, Venture Capital, Asset Management, Nidhi, Mutual Fund, Finance, Investment, Leasing,
Hire purchase etc. or any combination thereof)
(viii) to the best of his knowledge and belief, the information given in the application and its attachments is
correct and complete, and the proposed name does not infringe the registered trademark rights of any
6 PP-ACL&P

entity or person or a trademark which is subject of an application for registration, of any other person
under the Trade Marks Act, 1999.
(ix) he undertakes to be fully responsible for the consequences, in case the name is subsequently found to
be in contravention of section 20 and 21 of the Act and the prescribed guidelines.
There is an option in the e-form 1A for certification by the practicing Chartered Accountant, Company Secretary
and Cost Accountant, who will certify that he has used the search facilities available on the portal of the Ministry
of Corporate Affairs (MCA) i.e., www.mca.gov.in/MCA21 for checking the resemblance of the proposed name(s)
with the companies and LLPs respectively already registered or the name already approved and the search
report is attached with the application form. The professional will also certify that the proposed name is not an
undesirable name under the provisions of section 20 of the Companies Act, 1956 and also is in conformity with
Name Availability Guidelines, 2011. Where e-form 1A has been certified by the professional, the name will be
made available by the system online to the applicant without backend processing by the Registrar of Companies
(ROC). This facility is not available for applications for change of name of existing companies. Further in such a
case, only one name may be proposed and name availability obtained. However, it may be noted that if the form
is so certified and later on it is found that the name ought not to have been allowed under the provisions of
Section 20 of the Act and the guidelines issued by the Central Government, the professional shall be liable for
penal action under the provisions of the Act in addition to penal action under the regulations of the respective
Institutes.
Following documents have to be attached to e-form 1A:
(i) Copy of Board resolution of the existing company or foreign holding company as a proof of no objection
(ii) Copy of approval from Central Government as a proof of no objection
(iii) Trademark or authorisation to use trade mark, if the name of the company is based on trade mark or
application for deed of assignment.
Where e-form 1A has not been certified by the professional, the proposed name will be processed at the back
end office of ROC and availability or non availability of name will be communicated to the applicant.
The name, if made available to the applicant, shall be reserved for sixty days from the date of approval. If, the
proposed company has not been incorporated within such period, the name shall be lapsed and will be available
for other applicants.
Even after incorporation of the company, the Central Government has the power to direct the company to
change the name under section 22 of the Companies Act, 1956, if it comes to its notice or is brought to its notice
through an application that the name is identical with or too nearly resembles that of another existing company
or a registered trademark.
The Relevant Part of Name Availability Guidelines, 2011 is given at Annexure I at the end of Study. Since these
guidelines may change from time to time, students are advised to refer to the updated guidelines in the MCA
portal.

(4) Drafting and Printing of Memorandum and Articles of Association


After ascertaining name availability from the Registrar of Companies steps should be taken to get the memorandum
and articles of association for the proposed company drafted and printed. A public company limited by shares
need not necessarily prepare and get its articles of association registered along with its memorandum of
association. In such a case, Table A of Schedule I to the Companies Act, 1956 shall apply. However, as a
matter of practice, every company gets the articles prepared to suit its individual requirements, and registered
along with the memorandum of association.
Lesson 1 Company Formation and Conversion 7

The memorandum and articles shall be in conformity with the provisions of Section 15 and 30 of the Act.
If the promoters plan to get the securities of the proposed company listed with one or more designated stock
exchanges, it is advisable to send the draft of the memorandum and articles of association to those stock
exchanges for their scrutiny and suggestion to the effect whether they would like to have certain articles
incorporated therein in compliance with the provisions of the Listing Agreements of the stock exchanges.

(5) Stamping and Signing of Memorandum and Articles


The memorandum and articles should be got printed and stamped by the appropriate State Authority (Collector
of Stamps) under the Indian Stamp Act, 1899.
Thereafter, the memorandum and the articles should be signed by at least seven subscribers.
Each subscriber to the memorandum shall write in his/her own hand, his/her father/husbands name, occupation,
address and the number of shares subscribed for by him/her. The signatures of all the subscribers shall also be
witnessed. The witness shall also sign and write in his own hand, his name, his fathers name, occupation and
address.
It is pertinent to note the Stamping is a subject matter of State Revenue and not a matter of the Central
Government. Hence the Stamp Duty payable on the Memorandum and/or the Articles of Association shall be
determined according to the place of incorporation of the company.
W.e.f. 1.04.2010 companies are required to make payment of stamp duty electronically in respect of those
states which have authorised Central Govt. to collect stamp duty on their behalf. Stamp duty on e-Form 1,
Memorandum of Association (MoA) and Articles of Association (AoA) can be paid electronically through the
MCA portal and in such case submission of physical copies of the uploaded e-Form 1, MoA and AoA to the office
of RoC is not required. In case stamp duty is not paid electronically through MCA portal, it is required to deliver
simultaneously the original stamped physical copies of the uploaded e-Form 1, MoA and AoA along with a copy
of challan/ receipt in the concerned office of ROC.

(6) Dating of Memorandum and Articles of Association


The memorandum and articles are then dated, but the date must be the date of stamping orlater than the date
of their stamping and not, in any event, a date prior to the date of their stamping.

(7) Filing of Documents and Forms for Registration


E-form 1 is required to be filed as an application and declaration for incorporation of a company with Memorandum,
Articles of Association, and annexure containing details of subscribers (if the total number of subscribers is more
than seven) as attachments.
The following forms and documents, which are prescribed under the Companies Act, 1956 and the Companies
(Central Governments) General Rules and Forms (Amendment) Rules, 2006 are required to be prepared,
signed and filed with the concerned Registrar of Companies for the purpose of incorporation::-

Forms
(i) e-form 1 - Application and declaration for incorporation of a company filed pursuant to sections 33(1)
and (2) of the Companies Act, 1956, containing the Service request number of form 1A (application for
availability of name), Name of the Company, Name of the State in which company is to be registered,
name of office of the Registrar, Capital Structure, details of number of members, main division of industrial
activity of the company, No objection certificate in case there is any change in the promoters/first
subscribers to MoA, details of promoters, particulars of payment of stamp duty, Memorandum and
articles of association (as attachments), details of subscribers (as attachment, if number of subscribers
is more than seven ) along with the following declaration:
8 PP-ACL&P

I , Son/daughter/wife of do solemnly declare as under:


(a) That I am
An advocate of the Supreme Court or a High Court who is engaged in the formation of the
company; or
An attorney or pleader entitled to appear before a High Court who is engaged in the formation
of the company: or
A company secretary (in whole-time practice) in India who is engaged in the formation of the
company: or
A chartered accountant (in whole-time practice) in India who is engaged in the formation of the
company; or
A person named in the articles as a director, manager or secretary of the company.
(b) And I, further declare that the particulars given above are true to the best of my knowledge and
belief;
(c) Form 18 and 32 are also being filed simultaneously;
(d) I further confirm that I am duly authorised to submit this application; and that all the particulars
mentioned above are as provided in the articles of association as subscribed by the subscribers of
the company;
(e) That all the requirements of the Companies Act, 1956 and rules there under in respect of all the
matters precedent in the registration of the company and incidental thereto have been complied
with and I make this solemn declaration conscientiously believing the same to be true;
(f) That the company has paid correct stamp duty as per applicable Stamp Act.
(g) That the subscribers have given declaration of details of his/her conviction by any court for any
offence involving moral turpitude or economic or criminal offences or for any offences in connection
with the promotion, formation or management of a company.
(h) That the subscribers have given declaration that he/she has not been declared as proclaimed
offender by any Economic Offence Court or Judicial Magistrate Court or High Court or any other
court.
(ii) e-form 18 relating to notice of situation or change of situation of Registered office pursuant to Section
146 of the Companies Act, 1956. It has to be stated in this form whether Registered Office is Owned by
company; or Owned by Director (not taken on lease by company) or Taken on Lease by Company or
Owned by any other entity/Person (Not taken on lease by company. This form is to be pre certified by
any one of these professionals - company secretary or chartered accountant or cost accountant (in
whole-time practice). Further the company secretary or chartered accountant or cost accountant (in
whole-time practice) has to personally visit the registered office address or premises of the company
and has to verify that the company actually exists at this address. In this context, he also has to certify
that he has personally visited the registered office address, verified it and is of the opinion that
the premises are indeed at the disposal of the applicant company. Following documents have to
be attached to e-Form 18:
(a) Proof of Registered Office address which is mandatory attachment;
(b) No-objection certificate from director if registered office is owned by director (not taken on lease by
company);
Lesson 1 Company Formation and Conversion 9

(c) A proof that the company is permitted to use the address as the registered office of the company if
the same is owned by any other entity/person (not taken on lease by company).
(For specimen of e-form 18, notice of situation/change of situation of registered office, please refer the
CD provided along with the Study Material or see the link http://www.mca.gov.in/MCA21/
Download_eForm_choose.html).
(iii) e-form 32 filed pursuant to Section 303(2), 264(2) or 266(1)(a) and 266(1)(b)(iii) of the Companies Act
containing prescribed particulars of directors including managing/whole-time director/manager/secretary,
if any and the changes among them or consent of candidate to act as a managing director or director or
manager or secretary of a company and/or undertaking to take and pay for qualification shares. E-Form
32 is also required to be pre-certified by company secretary or chartered accountant or cost accountant
(in whole-time practice).
A written signed consent on a plain paper of every person who is being appointed as a director is also
required to be attached with the e-form 32. (For specimen of e-form 32, please refer the CD provided
along with the Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
E-Form 18 and e-Form 32 should be filed together at the time of filing of e-Form 1.

Documents
(i) Where stamp duty is paid in physical mode, a physical copy of the printed memorandum and articles of
association duly stamped, signed and dated is to be sent separately to the ROC. It may be noted that
in the case of a public limited company, registration of articles of association with the Registrar is optional,
but in the case of a private limited company, registration of articles of association with the Registrar is
compulsory [Refer Section 3(1)(iii)] of the Companies Act, 1956].
(ii) Any agreement, if any that the company on incorporation proposes to enter into with any individual for
appointment as its managing director or whole-time director or manager, as an attachment (optional)
with e-form 1.
(iii) General power of attorney on a non-judicial stamp paper of the appropriate value as applicable in the
relevant state signed by all the subscribers, in favour of one of them or any other person, for making
alterations, corrections, amendments etc.; on their behalf, in the memorandum and articles of association
and other documents/forms filed with the Registrar of Companies, if so required by the Registrar.
(Please see the specimen at Annexure XV).

(8) Pre-Certification
Form 18 and 32 are required to be pre-certified by a company secretary or chartered accountant or cost accountant
in whole-time practice.

(9) Registration and Filing Fee


Promoters must make sure to remit to the Registrar, alongwith theabove forms/ documents, the prescribed
registration fee and fee for filing of formsas per the rates contained in Schedule X to the Companies Act, 1956.
(Schedule X is given at Annexure II at the end of this study).
The fee payable for the purpose can be remitted either electronically (by using a Credit Card or by electronic
Bank transfer) or by cash/draft through challan generated electronically on submission of the e-form.

(10) Minimum Paid-up Capital


Ensure that the minimum paid-up capital is 5 lakh rupees or such higher paid-up capital as may be prescribed.
10 PP-ACL&P

(11) Scrutiny of Documents and Forms by Registrar


On receipt of the aforementioned documents, the office of the Registrar of Companies will scrutinise them and
if they are found complete in all respects, the Registrar will register the company and generate a CIN. If the
Registrar finds any defect or deficiency in any of the documents or forms, the Registrar will send an electronic
communication pointing out the defects and after the deficiencies are removed, the Registrar will register the
company.

(12) Issue of Certificate of Incorporation by Registrar


After the registration of the company, the Registrar will issue under his hand and seal of his office, the Certificate
of Incorporation in the name of the company and send it electronically. One may also take printout of the
Certificate of Incorporation generated online. The date mentioned by the Registrar in the Certificate of Incorporation
shall be the date of incorporation of the company, on which date the company will be considered to have come
into existence as a legal entity separate from its subscribers. (For specimen of Certificate of Incorporation,
please see Annexure III at the end of this study).

(13) Certificate of Commencement of Business


On registration, a public company cannot commence business or exercise any borrowing powers until it obtains
the Certificate of Commencement of Business.

4. PROCEDURE FOR INCORPORATION OF PRIVATE LIMITED COMPANY HAVING SHARE


CAPITAL
The procedure for the incorporation of a private limited company is similar to that of a public limited company (as
discussed above) with the following exceptions:
(i) The company must have a minimum paid-up capital of one lakh rupees or such higher paid-up capital
as may be prescribed.
(ii) There must be at least two subscribers in place of seven.
(iii) There must be at least two directors in place of three.
(iv) Registration of the articles of association is compulsory.
(v) The provisions of Section 3(1)(iii) of the Companies Act, 1956 should, be included while drawing up the
memorandum and articles of association of a private limited company.

5. PROCEDURE FOR INCORPORATION OF COMPANY LIMITED BY GUARANTEE


A company having the liability of its members limited by the memorandum of association to such amount as the
members may respectively undertake by the memorandum to contribute to the assets of the company in the
event of its being wound up, is known as company limited by guarantee Section 12(2)(b).
The procedure for incorporation of a company limited by guarantee is similar to the one required to be followed
for getting a public or a private limited company incorporated. However, the following distinctive features in the
case of a company limited by guarantee must be noted:
(i) A company limited by guarantee may or may not have a share capital.
(ii) A company limited by guarantee may be a public company or a private company.
(iii) According to sub-section (2) of Section 13 of the Companies Act, 1956, the memorandum of association
of a company limited by guarantee must state that the liability of its members is limited.
The memorandum of association of a company limited by guarantee must also state that every member
Lesson 1 Company Formation and Conversion 11

of the company undertakes to contribute to the assets of the company in the event of its being wound up
while he is a member or within one year after he ceases to be a member, for payment of the debts and
liabilities of the company, or of such debts and liabilities of the company as may have been contracted
before he ceases to be a member, as the case may be, and of the costs, charges and expenses of
winding up, and for the adjustment of the rights of the contributories among themselves, not exceeding
specified amount. [Refer to Sub-section (3) of Section 13 of the Companies Act, 1956].
(iv) Sub-section (2) of Section 27 of the Act lays down that the articles of a company limited by guarantee
shall state the number of members with which the company is to be registered.
(v) Section 37 (1) of the Act prohibits a company limited by guarantee and not having share capital
from inserting any provision in its memorandum or articles or in any resolution purporting to give any
person a right to participate in the divisible profits of the company otherwise than as a member of the
company.
(vi) Sub-section (2) of section 37 lays down that in the case of a company limited by guarantee, every
provision in its memorandum or articles or in any resolution purporting to divide the undertaking of the
company into shares or interests shall be treated as a provision for a share capital, notwithstanding that
the nominal amount or number of the shares or interests is not specified thereby.
In the memorandum of association of a guarantee company, however, a clause stating the amount of guarantee
shall have to be inserted in addition to the other necessary conditions. Similarly, in the articles of association of
such a company, an article stating the number of members with which the company is proposed to be registered
must be included.
The following procedural steps are required to be taken for getting a company limited by guarantee registered:
(1) Paid-up Capital: In case company to be formed is a private company it must have a paid up capital of one
lakh rupees and in case the company to be formed is a public company it must have a paid-up capital of five lakh
rupees or such higher paid-up capital as may be prescribed. However, if the company does not propose to have
a share capital then this requirement is not required to be complied with.
(2) Selection of Name of the Company and Ascertaining its Availability from ROC: Make an application to
the concerned Registrar of Companies in e-form 1A as prescribed in the Companies (Central Governments)
General Rules and Forms (Amendment) Rules, 2006, for the purpose and also pay the prescribed application
fee of ` 1000/- along with the application.
The fee payable for the purpose can be remitted either electronically (by using a Credit Card or by electronic
Bank transfer) or by cash/draft through Challan generated electronically on submission of the e-Form.
Not more than six names can be submitted to ascertain availability. The names of the proposed company are to
be given in e-form 1A in order of the promoters preference so that if the first name is not available, the Registrar
may consider the second name and if the second name is also not available, the Registrar may consider the
third name and so on. The proposed names should not be identical with, or too closely resemble, the names by
which a company in existence has been previously registered.
Before selecting the names, the promoters may be well advised to refer to the Name Availability Guidelines,
2011 issued by Ministry of Corporate Affairs for making a name available for registration. It must also be ensured
that the proposed names do not violate the provisions of Emblems and Names (Prevention of Improper Use)
Act, 1950.
(3) Drafting and Printing of Memorandum and Articles of Association: On receipt of name availability from
the Registrar of Companies, get the memorandum and articles of association of the proposed company drafted
by a competent professional.
If the company does not propose to have a share capital and it is to be incorporated as a public company, Table C
12 PP-ACL&P

in Schedule I to the Act has to be taken into consideration while drafting the memorandum and articles of association.
If the company proposes to have a share capital and it is to be incorporated as a public company, Table D in
Schedule I to the Act has to be taken into consideration while drafting its memorandum and articles of association.
(4) Stamping and Signing of Memorandum and Articles: Get the memorandum and articles stamped by the
appropriate State authority (Collector of Stamps) under the Indian Stamp Act, 1899.
After being stamped, get the memorandum and articles signed by at least two subscribers in case of a private
company and by at least seven subscribers in case of a public company. Each subscriber shall write in his/her
own hand, his/her name, his/her father/husbands name, occupation, address and the number of shares
subscribed for by him/her, if the company has a share capital. At least one person shall witness the signatures
of all the subscribers. The witness shall also sign and write in his/her own hand, his/her name, his/her fathers
name, occupation and address.
Under the system of MCA21, the Stamp Duty is to be paid only through electronic mode for the States who have
agreed for e-stamping. The Ministry had decided to accept payments of value upto ` 50000/-, for MCA 21
services, only in electronic mode. For the payments of value above ` 50,000, stakeholders have the option to
make payment either in electronic mode, or through paper challan.
A scanned copy of the duly stamped and executed MOA and the AOA is also required to be attached with e-form
1 and submitted electronically. Stamp duty on e-Form 1, Memorandum of Association (MoA) and Articles of
Association (AoA) can be paid electronically through the MCA portal and in such case submission of physical
copies of the uploaded e-Form 1, MoA and AoA to the office of RoC is not required. In case stamp duty is not
paid electronically through MCA portal, the applicant is required to deliver simultaneously the original stamped
physical copies of the uploaded e-Form 1, MoA and AoA along with a copy of challan/ receipt to the concerned
office of the ROC.
(5) Dating of Memorandum and Articles: Thereafter the memorandum and articles will be dated. This date
must be the date of stamping or later than the date of the stamping and not, in any event, a date prior to the date
of the stamping.
(6) Filing of Forms and Documents with Registrar:
Forms:
File the following forms with the concerned Registrar of Companies which are prescribed under the Companies
Act, 1956 and the Companies (Central Governments) General Rules and Forms, 1956:
(i) e-form 18 containing notice of situation or change in situation of registered office of the company. (For
specimen of e-form 18, notice of situation/change of situation of registered office, please refer the CD
provided along with the Study Material or see the link http://www.mca.gov.in/MCA21/
Download_eForm_choose.html). It has to be stated in e-form 18 whether Registered Office is Owned
by company; or Owned by Director (not taken on lease by company) or Taken on Lease by Company or
Owned by any other entity/Person (Not taken on lease by company. This form is to be pre certified by
any one of these professionals - company secretary or chartered accountant or cost accountant (in
whole-time practice). Further the company secretary or chartered accountant or cost accountant (in
whole-time practice) has to personally visit the registered office address or premises of the company
and has to verify that the company actually exists at this address. In this context, he also has to certify
that he has personally visited the registered office address, verified it and that the premises are intended
at the disposal of the applicant company. Following documents have to be attached to e-Form 18:
(a) Proof of Registered Office address which is mandatory attachment;
(b) No-objection certificate from director if registered office is owned by director (not taken on lease by
company);
Lesson 1 Company Formation and Conversion 13

(c) A proof that the company is permitted to use the address as the registered office of the company if
the same is owned by any other entity/person (not taken on lease by company).
(ii) e-from 32 containing prescribed particulars of directors including managing/ whole-time director/manager/
secretary, if any and the changes among them or consent of candidate to act as a managing director or
director or manager or secretary of a company and/or undertaking to take and pay for qualification
shares. e-form 32 is also required to be pre certified by company secretary or chartered accountant or
cost accountant (in whole-time practice). (For specimen of e-form 32, particulars of appointment of
directors and manager and changes among them, see please refer the CD provided along with the
Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
e-Form 18 and e-Form 32 should be filed together at the time of filing of e-Form 1.
(iii) A statutory declaration in e-form 1 as prescribed in the Companies (Central Governments) General
Rules and Forms (Amendment) Rules, 2006, executed by an advocate of the Supreme Court or of a
High Court, an attorney or a pleader entitled to appear before a High Court, or a secretary, or a chartered
accountant in whole-time practice in India, who is engaged in the formation of the company, or by a
person named in the articles as a director, manager, or secretary of the company, that all the requirements
of the Act and the rules thereunder have been complied with in respect of registration of the company
and matters precedent and incidental thereto [Refer Section 33 (2)].
(For specimen of e-form 1, declaration of compliance with the requirements of the Companies Act,
1956, on application for registration of a company, please refer the CD provided along with the Study
Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
Documents:
Prepare, get signed and file the following documents with the Registrar of Companies for getting the proposed
company registered, by way of e-filing:
(i) Stamped, signed and dated copy of the memorandum of association;
(ii) Stamped, signed and dated copy of the articles of association;
(iii) Any agreement, that the company on incorporation proposes to enter into with any person, for appointment
as its managing director or whole-time director or manager.
(iv) General power of attorney on a non-judicial stamp paper of the appropriate value as applicable in the
State, signed by all the subscribers, in favour of one of them or any other person, for making alterations,
corrections, amendments etc., on their behalf, in the memorandum and articles of association and other
documents/forms filed with the Registrar of Companies, if required by the Registrar.
(7) Registration and Filing Fee: Along with the above detailed documents and forms, pay the registration fee
and filing fee for documents and forms as per the rates prescribed in Schedule X of the Companies Act, 1956.
The fees is to be paid electronically as per the mode of payment discussed earlier.
(8) Scrutiny of Forms and Documents by Registrar: On receipt of the aforementioned documents and forms,
the office of the Registrar of Companies will scrutinise them and if they are found complete in all respects, the
Registrar will register the company and allot CIN. If the Registrar finds any defect or deficiency in any of the
documents or forms, he shall send an electronic communication pointing out the defects and after the deficiencies
are removed, the Registrar will register the company.
(9) Issue of Certificate of Incorporation by Registrar: A Certificate of Incorporation will be issued by the
Registrar of Companies under his hand and seal of his office and sent electronically.
One may take printout of Certificate of Incorporation which is generated online.
14 PP-ACL&P

The date mentioned by the Registrar in the Certificate of Incorporation shall be the date of incorporation of the
company, on which date the company will be considered to have come into existence as a legal entity independent
of its members.

6. PROCEDURE FOR INCORPORATION OF COMPANY FOR CHARITABLE AND OTHER PUBLIC


UTILITY PURPOSES WITHOUT ADDITION OF THE WORDS LIMITED OR PRIVATE LIMITED
TO ITS NAME (NON PROFIT COMPANIES)
The issue of licence and incorporation of companies to pursue charitable and other prescribed objects, with
limited liability without the addition to its name of the word Limited or the words Private Limited are regulated
by Section 25 of the Companies Act, 1956.
Pursuant to the provisions of Section 25 (1), an association, desirous of being incorporated as a company with
limited liability without the addition to its name of the word Limited or the words Private Limited shall take the
following procedural steps for securing a Licence under Section 25 of the Companies Act, 1956 and for getting
itself registered under the Act:
1. To select not more than six names in the order of their preference, for obtaining availability of one of
those names for adoption by the proposed company.
2. To make an application to the Registrar of Companies of the State in which the registered office of the
proposed company is to be situated for seeking name availability. The application shall be in e-Form No.
1A as prescribed in the Companies (Central Governments) General Rules and Forms (Amendment)
Rules, 2006 and shall be accompanied by a fee of ` 1000/- to be paid electronically.
3. The Registrar of Companies to furnish the required information to the applicants, ordinarily within three
days of the receipt of the application.
4. On receipt of name availability from the Registrar of Companies, to get the memorandum and articles of
association for the proposed company suitably drafted. The memorandum shall be in the form specified
in Annexure I to the Companies Regulations, 1956, or in a form as near thereto as the circumstances
admit. Before getting these documents printed, it is advisable to have their drafts informally vetted by
the Registrar of Companies, in whose region the registered office of the proposed company is to be
situated.
5. To make an application to the Central Government, for the grant of a licence under Section 25 of the
Companies Act, 1956 in e-form 24A. All applications filed under this section on or after 1st May 2011 are
being dealt by the office of concerned Registrar of Companies.
6. According to Section 25 of the Act, the applicants have to prove to the satisfaction of the Registrar of
Companies that an association is already in existence or is about to be formed as a limited company for
promoting commerce, art, science, religion, charity or any other useful object and that the association
intends to apply its profits, if any, or other income, for promoting its objects and that it prohibits the
distribution of any dividend to its members.
7. Along with e-form 24A, in case of new association, for issue of licence u/s 25, the following documents
are also required to be attached:
(i) the memorandum and articles of association of the proposed company;
(ii) a declaration on non-judicial Stamp Paper of the prescribed value (also required to be submitted
physically to the concerned Registrar of Companies simultaneously of filing as attachment with
application) by an advocate of the Supreme Court, or of a High Court, an attorney or a pleader
authorised to appear before a High Court or a Secretary, or a Chartered Accountant, in whole-time
practice in India, to the effect that the Memorandum and Articles of Association have been drawn up
Lesson 1 Company Formation and Conversion 15

in conformity with the provisions of the Act and that all the requirements of the Act and the Rules
made thereunder have been duly complied with in respect of registration or matters incidental or
supplemental thereto;
(iii) a list of the names, descriptions, addresses and occupations of the promoters (where a firm is a
promoter, of each partner in the firm), as well as of the members of the proposed Board of directors,
managers or secretary together with the names of companies, associations and other institutions,
in which such promoters, partners and members of the proposed Board of directors are directors or
hold responsible positions, if any, with descriptions of the positions so held;
(iv) if the association is one which is already in existence, three copies of the following documents
submitted by the management thereof to its members, for each of the two complete financial years
immediately preceding the date of the application, or where the association has functioned only, for
one such financial year, for such year :-
(a) the accounts ;
(b) the balance-sheet ; and
(c) the reports on the working of the association
(v) an estimate of the future annual income and expenditure of the proposed company, specifying the
sources of the income and the objects of the expenditure;
(vi) a statement giving a brief description of the work, if any, already done by the association and of
work proposed to be done by it after registration in pursuance of Section 25 of the Act;
(vii) a statement specifying briefly the grounds on which the application is made; and
(viii) a declaration on non-judicial Stamp Paper of the prescribed value (also required to be submitted
physically at the concerned Registrar of Companies office simultaneously of filing as attachment
with application) by each of the persons making the application, in the Form set out in Annexure V
to the Companies Regulations, 1956 or in a form as near thereto as the circumstances admit;
If any document specified above is not in English or in Hindi a translation of that document either in
English or in Hindi certified to be correct by any promoter or proposed director, or in the case of an
association which is already in existence, by any member of its executive or governing body, shall be
furnished.
8. The Registrar may also check whether there is any other company in existence with similar objects in or
near the place where the registered office of the proposed company will be situated and whether the
issue of a licence to the proposed company is really necessary.
9. The Registrar of Companies may, suo motu, make a reference to the District Magistrate or the State
Government and the public at large, and invite their objections, if any, to the issue of a licence to the
proposed company.
10. Having received the views of the Central/ State Government and also objections from the public, if any,
the Registrar of Companies takes a decision whether or not the licence, applied for, should be granted.
11. The Registrar of Companies, being satisfied on all accounts, may, by a licence, direct that the association
may be registered as a company with limited liability without the addition to its name, the word Limited
or the words Private Limited [Sub-section (1) of Section 25].
12. The Registrar of Companies may also direct the company to insert in its memorandum or articles or
partly in the one and partly in the other, such conditions of the licence as may be specified by him in that
behalf. The association may there upon be registered accordingly and on registration shall enjoy all the
16 PP-ACL&P

privileges and be subject to the provisions of the Act and shall also be subject to the obligations of
limited companies.
13. After obtaining the licence, to get the memorandum and articles, as approved by the Registrar of
Companies, printed and to ensure that the conditions of the licence as directed by the Registrar of
Companies are incorporated therein.
14. File the following documents electronically with the Registrar of Companies for getting the proposed
company registered:
(a) Stamped copy of the memorandum and articles of association. It shall be printed and divided into
paragraphs numbered consecutively and shall be signed by each subscriber, who shall add, his
address, description and occupation, if any in the presence of at least one witness, who shall also
sign and shall likewise add his address, description and occupation, if any (Section 15 of the
Companies Act, 1956);
(b) Stamped and signed copy of the Articles of Association;
(c) E-form 1 duly executed;
(d) E-form 18;
(e) E-from 32;
(f) Any agreement that the company on incorporation proposes to enter into with any person for
appointment as its managing director or whole-time director or manager;
(g) Power of attorney on a non-judicial Stamp Paper of the requisite value signed and executed by all
the subscribers in favour of one of them or any other person for making necessary alterations,
corrections, amendments etc. on their behalf, in the memorandum and articles and other papers
filed with the Registrar of Companies.
15. Along with the above detailed documents, to pay the documents filing fee as per the rates prescribed in
Schedule X of the Companies Act, 1956 and as per the mode of payment discussed earlier.
16. The Registrar of Companies will thereupon scrutinise the documents filed for registration and if there
are deficiencies, he shall communicate the same electronically to the applicant. After the deficiencies
are made good, the Registrar shall register the company and allot CIN.
17. A Certificate of Incorporation will be issued by the Registrar under his hand and Seal of his Office and
sent to the company electronically. . A printout may be taken of the online generated Certificate of
Incorporation. The date mentioned by the Registrar in the Certificate shall be the date of incorporation
of the company, on which date the company will be considered to have come into existence as a legal
entity separate from its subscribers.

7. PROCEDURE FOR ISSUE OF LICENCE UNDER SECTION 25 TO A COMPANY ALREADY


REGISTERED
Any company registered under the Act as limited company, which is desirous of being incorporated without the
addition to its name of the word Limited or the words Private Limited, shall make an application in e-form 24A
as prescribed in the Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006
to the Registrar of Companies concerned for a licence under Section 25 of the Companies Act, 1956.
The application shall be accompanied by the following documents, as attachment, namely,
(i) the Memorandum and Articles of Association of the proposed company;
(ii) a list of the names, descriptions, addresses and occupations of its directors, and its manager or secretary,
Lesson 1 Company Formation and Conversion 17

if any, together with the names of companies, associations and other institutions, in which the directors
of the applicant company are directors or hold responsible positions, if any, with descriptions of the
positions so held;
(iii) following documents submitted to the company in general meeting for each of the two financial years
immediately preceding the date of the application, or when the company has functioned only for one
financial year, for such year:
(a) the profit and loss account;
(b) the balance sheets;
(c) the annual report of the Board of directors; and
(d) the audit reports;
(iv) a statement showing in detail the assets (with estimated value thereof) and the liabilities of the company,
as on the date of the application or seven days before making the application;
(v) an estimate of the future annual income and expenditure of the proposed company, specifying the
sources of the income and the objects of the expenditure;
(vi) a statement giving a brief description of the work, if any, already done by the company and of the work
proposed to be done by it after registration in pursuance of Section 25;
(vii) a statement specifying briefly the grounds on which the application is made; and
(viii) a declaration on non-judicial Stamp Paper of the prescribed value by each of the persons making the
application, in the form set out in Annexure V to the Companies Regulations, 1956, or in a form as near
thereto as the circumstances admit.
If any document specified above is not in English or in Hindi a translation of that document either in English or in
Hindi certified to be correct by any director of the company or its manager, if any, shall be furnished together with
the documents.
MCA has done away with the requirement of a notice which was required to be published in one English newspaper
and vernacular newspaper of the local area where the proposed company is to be established within one week
of making an application to the Registrar of companies.
Registrar of Companies shall scrutinize the documents and if the Registrar of Companies is satisfied that the
application made is complete in all respects, the Registrar of Companies may grant the license within 30 days
from the date of filing of application.

Form of Memorandum of Association of the Proposed Company


The memorandum of association of the proposed company shall be in the form specified in Annexure I to the
Companies Regulations, 1956, or in a form as near thereto as circumstances admit.

8. PROCEDURE FOR INCORPORATION OF A COMPANY AS SUBSIDIARY OF AN EXISTING


COMPANY
As per provisions of Section 4 of the Companies Act, 1956, a company shall be deemed to be a subsidiary of
another company if, but only if,
(a) that other controls the composition of its Board of directors; or
(b) that other:
(i) where the first-mentioned company exercises or controls more than half of the total voting power of
such company;
18 PP-ACL&P

(ii) where the first-mentioned company holds more than half in nominal value of its equity share capital;
or
(c) that first-mentioned company is a subsidiary of any company which is that others subsidiary.
As per provisions of the Act, in order to make the proposed company, CD Ltd., a subsidiary of the existing
company, AB Ltd., AB Ltd. must control the composition of the Board of Directors of CD Ltd. or it must exercise
or control more than half of the total voting power in CD Ltd. or it must hold more than half of nominal value of the
equity share capital of CD Ltd.
In other words, the articles of association of CD Ltd. must contain the following provisions:
AB Ltd. shall have the power to appoint, remove or replace majority of the directors of CD Ltd. or
AB Ltd. shall hold majority of the shares, having voting rights, in CD Ltd. and the aforementioned provisions
in the articles of association of CD Ltd. shall not be alterable, as long as the majority of shares are so
held.
Keeping the above provisions in view, CD Limited shall become a subsidiary of AB Ltd. by a legal fiction and no
separate application for registration of the subsidiary is required.

9. UNLIMITED COMPANIES
By virtue of Section 12(2)(c) of the Act, an unlimited company is a company not having any limit on the liability of
its members. Thus, the maximum liability of the members of such a company, in the event of its being wound up,
could extend to their entire personal property to meet the debts and obligations of the company by contributing
to its assets. However, the liability of the members is only towards the company and not towards companys
creditors directly and hence, only the liquidators of the company can ask the members to contribute to its assets
which will be used in the discharge of the companys debts and the cost of winding up.
Section 26 provides that an unlimited company must have Articles of Association prescribing regulations for the
Company and Section 27 provides that these Articles shall state the number of members with which the company
is to be registered and if the company has a share capital, the amount of the share capital.
The Articles of an unlimited company shall be in the Form in Table E of Schedule I to the Act.
As per the provisions of Section 32, an unlimited company may convert itself into a limited company, subject to
the condition that all its debts, liabilities, obligations or contracts incurred before the conversion would not be
affected by its change of status.
The procedure for incorporation of such companies is similar to that of companies with limited liability.

10. PRODUCER COMPANIES


Section 581A(L) defines Producer Company as a body corporate having objects or activities specified in Section
581B and registered as Producer Company under this Act.
The objectives for which producer companies may be formed are laid down in Section 581B. [These are explained
in lesson 29 of Study Company Law of Executive Programme].

Procedure for Incorporation of a Producer Company


Section 581C of the Act lays down the provision relating to formation and registration of a producer company.
Any ten or more individuals, each of them being a producer, or any two or more producer institutions or a
combination of ten or more individuals and producer institutions, desirous of forming a producer company having
its objects, specified in Section 581B and otherwise complying with the requirements of this Part and the provisions
of this Act in respect of registration, may form an incorporated company as Producer Company under this Act.
Lesson 1 Company Formation and Conversion 19

A Producer Company can be incorporated only for the objects as enumerated in Section 581B of the Companies
Act, 1956 and for no other purpose, whether directly or indirectly. It is legal requirement for a producer company
to have a Chief Executive whose position is akin to that of a Managing Director in companies other than
producer companies.
The following steps shall be involved in the formation of producer company:
(1) Select few suitable names which should indicate as far as possible the main object of the proposed
producer company with Producer Company Limited as the last words of the name of such company.
Ascertain the availability of name from the Registrar of Companies by making an application electronically
in e-form 1A for the purpose along with the prescribed application fee of ` 1000/-. The application shall
be made to the Registrar of the State in which the registered office of the producer company is proposed
to be situated.
The provisions as regard the selection of name, as are applicable in terms of Section 20 of the Act read
with Emblems and Names (Prevention of Improper Use) Act, 1950 shall mutatis mutandis apply to
producer companies; name must be according to Name Availability Guidelines, 2011 (See Annexure I).
(2) On receipt of communication from the Registrar of Companies intimating that the name applied for is
available, get the Memorandum and Articles of Association of the company drafted and printed. The
Memorandum and Articles of Association should be prepared in accordance with Section 581F and
581G respectively of the Act
(3) Stamping and Signing of Memorandum and Articles: The memorandum and articles of association
should be got printed and stamped by the appropriate State Authority (Collector of Stamps) in accordance
with the requirement of the Indian Stamp Act, 1899. Thereafter, the memorandum and the articles should
be signed by the requisite subscribers, i.e., ten or more individuals, each of whom being a producer or
any two or more producer institutions or a combination of ten or more of such producers and producer
institutions.
Each subscriber to the memorandum shall write in his/her own hand, his/her father/husbands name,
occupation, address and the number of shares subscribed for by him/her. The signatures of all the
subscribers shall also be witnessed. The witness shall also sign and write in his own hand, his name,
his fathers name, occupation and address.
(4) Dating of Memorandum and Articles: The memorandum and articles are then dated. The date must be
the date of stamping or later than the date of stamping and not a date prior to the date of stamping.
(5) Objects of the Producer Company: The object clause of the memorandum of association of the producer
company must specify all or any of the matters specified in Section 581B.
(6) Appointment of first directors: The first director of the producer company be named in the articles of the
Company who will hold office till directors are appointed within a period of ninety days of the registration
of the producer company. However in case of an inter-state co-operative society which has been registered
as Producer Company under Section 581J(4) the words ninety days shall be substituted by three
hundred and sixty five days. The number of directors shall not be less than five (Sections 581O and
581P).
(7) Filing of Documents and Forms for Registration (electronically as attachment with e-form 1):
Documents :
(i) Memorandum and articles of association duly stamped, signed and dated.
(ii) Power of Attorney, duly stamped and executed by all the subscribers, authorising any one of them
20 PP-ACL&P

or any other person to follow up the matter with the Registrar of Companies. [See Annexure XV at
the end of Study].
(iii) Agreement, if any, for appointment of the Chief executive;
Forms (to be filed electronically)
(i) A statutory declaration in e-form No. 1 (on Stamp Paper) as prescribed in the Companies (Central
Governments) General Rules and Forms (Amendment) Rules, 2006, declaring compliance of all
and incidental matters regarding formation of companies [Section 33(2)].
(ii) e-form No. 18 containing notice of situation or change of situation of registered office of the company.
(For specimen of e-form No. 18, notice of situation/change of situation of registered office, please
refer the CD provided along with the Study Material or see the link http://www.mca.gov.in/MCA21/
Download_eForm_choose.html). It has to be stated in this form whether Registered Office is Owned
by company; or Owned by Director (not taken on lease by company) or Taken on Lease by Company
or Owned by any other entity/Person (Not taken on lease by company. This form is to be pre certified
by any one of these professionals - company secretary or chartered accountant or cost accountant
(in whole-time practice). Further the company secretary or chartered accountant or cost accountant
(in whole-time practice) has to personally visit the registered office address or premises of the
company and has to verify that the company actually exists at this address. In this context, he also
has to certify that he has personally visited the registered office address, verified it and is of
the opinion that the premises are indeed at the disposal of the applicant company. Following
documents have to be attached to e-Form 18:
(a) Proof of Registered Office address which is mandatory attachment
(b) No-objection certificate from director if registered office is owned by director (not taken on lease
by company)
(c) A proof that the company is permitted to use the address as the registered office of the company
if the same is owned by any other entity/person (not taken on lease by company.
(iii) e-form No. 32 containing prescribed particulars of directors including managing/whole-time director/
manager/secretary, if any and the changes among them or consent of candidate to act as a managing
director or director or manager or secretary of a company and/or undertaking to take and pay for
qualification shares. e-Form 32 is also required to be pre certified by company secretary or chartered
accountant or cost accountant (in whole-time practice). (For specimen of e-form No. 32, particulars of
appointment of directors and manager and changes among them, please refer the CD provided along
with the Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
e-Form 18 and e-Form 32 should be filed together at the time of filing of e-Form 1.
Note:- Stamp duty on e-Form 1, Memorandum of Association (MoA) and Articles of Association
(AoA) can be paid electronically through the MCA portal and in such case submission of physical
copies of the uploaded e-Form 1, MoA, and AoA to the office of RoC is not required.
Payment of stamp duty electronically through MCA portal is mandatory in respect of the States
which have authorized the Central Government to collect stamp duty on their behalf.
In case stamp duty is not paid electronically through MCA portal, it is required to deliver
simultaneously the original stamped physical copies of the uploaded e-Form 1, MoA and AoA
along with a copy of challan/receipt in the concerned office of RoC failing which such e-Form
shall be put into Waiting for user clarification in terms of Regulation 17 of the Companies
Regulations, 1956
Lesson 1 Company Formation and Conversion 21

Refund of stamp duty, if any, will be processed by the respective state or union territory
government in accordance with the rules and procedures as per the state or union territory
Stamp Act.
(8) Registration and Filing Fee: Promoters must make sure to remit to the Registrar, alongwith theabove
forms/documents, the prescribed registration fee and fee for filing of formsas per the rates contained in
Schedule X of the Companies Act, 1956. The fees is to be paid electronically as per the mode of
payment discussed earlier.
(9) Certificate of Incorporation: After the Registrar is fully satisfied, that all the requirements of this Act have
been complied with in respect of registration and matters precedent and incidental thereto, he shall
within thirty days of the receipt of the documents required for registration, register the memorandum,
articles and other documents, if any, and issue a certificate of incorporation under this Act.
The Registrar shall issue the certificate of incorporation (COI) bearing a Corporate Identity Number
(CIN) consisting of 21 digits within 30 days of the receipt of the document required for registration and
send it electronically. One may also take printout of the online generated COI.
(10) Reimbursement of promotional expenses: The producer company may reimburse to its promoters
associated with the promotion and registration of the company, all other direct costs associated with the
promotion and registration of the company including registration, legal fees, printing of the memorandum
and articles of association and the payment thereof shall be subject to the approval at its first general
meeting of the members.
On registration, the producer company shall become a body corporate as if it is a private limited company. A
producer company can only be limited by shares. The liability of its members shall be limited by the memorandum
to the amount, if any, unpaid on the shares respectively held by the members.
For the purpose of application of the Companies Act, it shall be deemed as if it is a private company but the limit
to the number of members as is applicable to private company shall not apply to the producer company. [Section
581C (5)].

11. PROCEDURE TO FORM A NIDHI COMPANY


As per report of Sabanayagam Committee on Nidhis constituted by Central Government vide Notification No.5/
7/2000-CL.V dated 23 March, 2000, the definition of Nidhi is as under:
Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning
for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by
lending only to individuals, also enrolled as members, and which functions as per Notification and Guidelines
prescribed by the DCA (Now the Ministry of Corporate Affairs).
Nidhi or Mutual Benefit Society means a company, which the Central Government may, by notification in
Official Gazette, declares to be a Nidhi or Mutual Benefit Society, as the case may be. (Section 620 A)
The declaration by notification will be made only in respect of such companies whose object is to enable members
to save money, to invest their savings and to secure loans at favourable rates of interest by inculcating the habit
of thrift and compulsory savings in the minds of poor and middle class people and whose transactions are only
with members and not with public. On getting a declaration under the Act, they enjoy special privileges and
concessions and are subject to the restriction/prohibitions notified from time to time. Business transactions of
Nidhi companies are restricted only with its members/shareholders. Shares are not offered to the public for
subscription but allotted to those who desire to take advantage of depositing and borrowing money. Their business
is confined to receiving deposits and lending money to members and does not extend to carrying on any other
business or trade.
22 PP-ACL&P

In order to obtain declaration as Nidhi, the applicant company should fulfil the various conditions stipulated by
the Central Government vide its principal notification No. G.S.R. 555(E), dated. 26.07.2001, G.S.R. 308(E) and
309(E), dated 30.04.2002 and as further amended from time to time. The important conditions are given below:-
A Nidhi or Mutual Benefit Society shall not:-
(i) issue any equity share of nominal value of less than ` 10/- each;
(ii) levy service charges for issue of shares;
(iii) open any current accounts with its members;
(iv) admit as member, any body corporate or trust;
(v) enter into any financial dealing with any person other than its members;
(vi) pledge any type of security lodged with it by its members;
(vii) take further deposits from or lend further money to any body corporate ;
(viii) enter into any partnership arrangement in its borrowing or lending activities;
(ix) issue prepaid interest warrants;
(x) carry on business of chit fund or hire purchase finance or leasing finance or insurance business or
acquisition of shares or debentures issued by any body corporate except the shares of another Nidhi, if
specifically permitted by the Central Government;
(xi) make any preferential allotment of shares to any persons or group of persons but shall make only rights
issue of shares and the unsubscribed portion can be apportioned by the Board of Directors in terms of
Section 81 of the Companies Act, 1956. (This restriction shall not apply to allotment of shares up to the
face value of ` 100 to new deposit holders or borrowers and in respect of qualification shares held by
directors);
(xii) acquire another company by purchase of shares or control of composition of Board of Directors otherwise
than through amalgamation or merger under the Companies Act and subject to the regulations applicable
to Nidhi companies in force;
(xiii) enter into any arrangement for the change of its management without a special resolution passed in its
general meeting and approval of the Central Government;
(xiv) carry on any business other than the business of borrowing or lending in its own name and allow use of
its name by any other body corporate whose main object is to earn profit by borrowing and lending;
(xv) pay any brokerage or incentive for mobilizing deposits from members or for deployment of funds or for
granting loans;
(xvi) Issue or cause to be issued any advertisement in any form for soliciting deposits. Private circulation of
the details of the fixed deposit scheme among members shall not be considered to be advertisement
inviting deposits;
(xvii) have membership of not less than 500 members at any time;
(xviii) ensure that the total net owned funds excluding the proceeds of preference share capital is not less
than ` 10 lacs or such amount as may be notified by the Central Government;
Those Nidhi companies which adhere to all the provisions of the above said notification may undertake the
business as insurance brokers, lockers provides and providing advisory services to its members with prior
approval of regulatory authority and subject to any other law. Their annual income from mortgage and jewel loan
shall not fall below 80 per cent of gross income at any point of time during a financial year. The company
Lesson 1 Company Formation and Conversion 23

proposed to be incorporated as Nidhi or mutual benefit society should not use the words mutual funds forming
part of its name.
A Board resolution should be passed for submission of application in e-form 63 as prescribed in the Companies
(Central Governments) General Rules and Forms (Amendment) Rules, 2006 to the Central Government i.e.
Headquarters of the Ministry of Corporate Affairs. The e-form 63 should be filed by the managing director or
director or manager or secretary duly authorised by the Board of directors..
The following documents should be attached with e-form 63:
1. Certificate from a chartered accountant certifying that it has complied with the directions issued by the
Central Government from time to time and that the ratio of loan to deposits is within the prescribed limits.
2. Copy of resolution of the board of directors in support of the proposal of the company.
3. Certificate signed by two directors regarding the number of members as on the date of application
(membership should not be less than 500)
4. Certificate from the auditors of the company to the effect that the company has complied with the
directions of the Ministry of Corporate Affairs issued from time to time and has maintained the books of
account according to recognized principles of accounting.
On being satisfied that the requirements of the Act and the rules made thereunder have been duly complied
with, the Central Government shall issue a notification declaring the company as Nidhi or Mutual Benefit
Society.
In Nidhi or mutual benefit society, a person cannot be director for more than ten years.It shall also obtain
certificate every year from the statutory auditors certifying that it has complied with the directions specified in this
notification and has maintained its books of account according to recognised principles of accounting.
A Nidhi or Mutual Benefit Society may accept deposits not exceeding twenty times of its Net Owned Funds
(NOF) as per last audited balance sheet. Net owned funds means the aggregate of paid up equity capital and
free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance
sheet of the company. A reserve shall be considered as a free reserve if it is available for distribution as dividend.
A company declared as a Nidhi or Mutual Benefit Society under section 620A of the Companies Act, 1956 may
after the publication of Central Governments notification declaring it as a Nidhi Company or mutual benefit
society, open branches only if it has earned profit for last three continuous years. A Nidhi or Mutual Benefit
Society may open up to three branches, subject to the above condition, within the Revenue District; and beyond
three branches outside the District, with the prior permission of the Regulatory Authority. No such company shall
open branches or collection centres or offices or deposit centres, by whatever name called, outside the State of
its Registered Office.
The application for permission to open branches of Nidhi Company should be submitted electronically in e-form
64 to the Regional Director.
Following documents needs to be attached to form no. 64:-
(a) Copy of the board or members resolution.
(b) Details of remuneration paid to directors for last three years- if any.
(c) Cash or fund flow projection for next three years.
Further every company declared as a Nidhi or Mutual Benefit Society under section 620A of the Companies Act,
shall also adhere to the prudential norms for revenue recognition and classification of assets in respect of
mortgage loans / jewel loans issued vide notification G.S.R. 309(E) dated the 30th April, 2002 as amended from
time to time.
24 PP-ACL&P

12. MUTUAL BENEFIT FUND


Under Section 620A of the Act, the words Nidhi or Mutual Benefit Society are used. However, even before the
commencement of the Companies Act, 1956, such class of companies were being registered with different
names, such as Permanent Fund, Paraspara Sahaya Nidhi, Mutual Benefit Society/ Mutual Benefit Fund and
so on.
The role of a Mutual Benefit Fund is no different from a Nidhi Company and all the provisions as contained in
various notifications issued by the Ministry of Corporate Affairs under Section 620A of the Act have to be complied
with by such companies also. Such Mutual Benefit Funds have to function on the same lines as a Nidhi company
and have also to be notified by the Central Government under the said section.

13. PROCEDURE TO REGISTER A FOREIGN COMPANY IN INDIA


As per Section 591 of the Act, Foreign Companies are those companies which are incorporated outside India,
but establish a place of business within India. Further, under sub-section (2) of that section, where not less than
fifty per cent of the paid-up share capital( whether equity or preference or partly equity and partly preference) of
a company incorporated outside India and having an established place of business in India, is held by one or
more citizens of India or by one or more bodies corporate incorporated in India or by one or more citizens of
India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company
shall comply with such of the provisions of the Act as may be prescribed with regard to the business carried on
by it in India, as if it were a company incorporated in India.
In order to speed up and simplify the process of incorporation of companies and establishment of principal place
of business in India by Foreign Companies for reduction in time taken by Registrar of Companies, the Ministry
vide circular no. 6/2011 dated 8th March, 2011 simplified the procedure.
Only Form-1 shall be approved by ROC office. Form 18 and 32 shall be processed by the system online.
The Category Incorporation Forms (Form 1A, 37, 39, 44 and 68) would have highest priority for approval.
(1) Foreign companies which, establish a place of business within India are required to deliver the e-form 44 (for
specimen form please refer the CD provided along with the Study Material or see the link http://www.mca.gov.in/
MCA21/Download_eForm_choose.html) along with the following documents as attachments, to the Registrar of
Companies within thirty days of the establishment of the place of business, for registration
Charter, statutes or memorandum and articles of association or other instrument constituting or defining
the constitution of the company. If the same is not in English language then a translated copy in English
language should be attached.
Details of individuals directors are to be attached. Details should contain name, surname, former
name-if any, residential address, occupation and other directorship, if any.
Approval letter from Reserve Bank of India for the setting up of business.
Power of attorney or board resolution in favour of the authorised representatives.
Directors details in case of body corporate, details containing name and complete address of body
corporate.
Secretary details if any.
The form will be digitally signed by the authorized representative of the foreign company. There is no need to
apply and obtain DIN for directors of foreign company, but the DSC of authorised representative is mandatory,
which again is not required to be registered on MCA portal.
The fee to be paid to the Registrar in pursuance of section 601 for registering any document relating to a
Lesson 1 Company Formation and Conversion 25

foreign company shall be ` 5000. Refer rule 20 of Companies (Central Government) General Rules and
Forms), 1956.
Stamp duty on e-Form 44 can be paid electronically through the MCA portal.
Payment of stamp duty electronically through MCA portal is mandatory in respect of the States which have
authorized the Central Government to collect stamp duty on their behalf. In respect of the States from whom the
authorization is yet to be received, the company will continue to pay stamp duty outside the MCA portal.
Refund of stamp duty, if any, will be processed by the respective state/ union territory government in accordance
with the rules and procedures as per the state/ union territory Stamp Act.
(2) The details of persons authorised in India on behalf of the company should contain the following particulars,
that is to say:
(i) in the case of an individual, his PAN Number, his present name and surname in full, any former name or
names and surname or surnames in full, fathers or husbands name, his usual residential address, date
of birth, his nationality, and if that nationality is not the nationality of origin, his nationality of origin, and
his business occupation, if any, or if he has no business occupation but holds any other directorship or
directorships, particulars of that directorship or of some one of those directorships; and
(ii) in the case of a body corporate, its corporate name and registered or principal office; and the full name,
address, nationality and nationality of origin, if different from that nationality of each of its directors.
Regulatory provisions under Foreign Exchange Management (Establishment in India of Branch or Office or
other place of business) Regulations, 2000
A foreign company or individual planning to set up business operations in India can do so through a Liaison
Office / Representative Office, Project Office or a Branch Office. The FEM (Establishment in India of Branch or
Office or other place of business) Regulations, 2000 govern the opening and operation of such offices.
Accordingly, Companies incorporated outside India, desirous of opening a Liaison/Branch office in India have to
make an application in form FNC-1. It may be noted that RBI has authorized AD Category I bank to forward FNC
1 along with the necessary enclosures along with the comments and recommendations to
The Chief Manager-in-charge,
Reserve Bank of India
Foreign Exchange Department
Foreign Investment Division
Central Office
Mumbai - 400 001
The applications will be considered by Reserve Bank of India under Reserve Bank route or Government route.
For full details, please refer to the Master Circular No. RBI/2012-13/7 dated July 2, 2012 as amended from time
to time.

14. CONVERSION OF COMPANIES


A company can be converted from one type to another. The procedures are given hereunder with respect to
conversion of:
(a) Private Company into Public Company;
(b) Public Company into Private Company;
(c) Sole Proprietor Concern into Limited Company;
(d) Partnership Firm into a Limited Company;
26 PP-ACL&P

(e) Private Company into Public Company;


(f) Conversion of Company into Limited Liability Partnership,
(g) Inter-state Cooperative Society into a Producer Company.

Re-registration of Companies
Under UK Companies Act, 2006, a company can be converted from one type to another by re-registration within
the terms of the Act.
It provides for the procedures for re-registration from:
(a) private to public Company (Sections 90 to 96)
(b) a public company to a private company (Sections 97 to 101)
(c) a private limited company to an unlimited company (Section 102 to 104)
(d) an unlimited private company to a limited company (Sections 105 to 108)
(e) a public company to an unlimited private company (sections 109 to 111)

15. CONVERSION OF PRIVATE COMPANY INTO PUBLIC COMPANY


Section 44 of the Companies Act, 1956 lays down that if a private company alters its articles in such a manner
that they no longer contain the provisions which, under clause (iii) of Sub-section (1) of Section 3 of the Act, are
required to be included in its articles in order to constitute it a private company, it shall, as on the date of the
alteration, cease to be a private company. For such a conversion, the private company is required to take the
following procedural steps:
1. Hold a meeting of the Board of directors of the company to pass resolutions
(i) for approving proposal for conversion of the company into a public company;
(ii) for fixing time, date and venue for holding a general meeting of the company for passing the required
special resolution for conversion of the company into a public company;
(iii) for approving notice for the general meeting along with the explanatory statement as required under
Section 173 (2) of the Companies Act, 1956. The notice shall contain texts of the special resolutions
which will be required to be passed at the meeting; and
(iv) for authorising the company secretary or any other competent officer to issue notice of the general
meeting on behalf of the Board.
The following resolutions will be required to be passed at the general meeting:
(i) Special resolution altering articles under Section 31 of the Act, converting a private company into
public company.
(For specimen of the special resolution altering articles converting a private company into public
company, please see Annexure IV at the end of this Study).
(ii) Special resolution for changing the name of the company as per proviso to Section 21 of the Act.
(For specimen of the special resolution for change of name of the company, please see Annexure
V at the end of this Study).
(iii) Special resolution for altering the memorandum of association (name clause) of the company in
accordance with section 16 of the Act.
Lesson 1 Company Formation and Conversion 27

(For specimen of the special resolution altering memorandum of association (name clause) of the
company, please see Annexure VI at the end of this study).
Note: The articles of association of the company shall be altered in such a manner that they would -
(i) no longer contain the provisions which, under clause (iii) of Sub-section (1) of Section 3 of the
Act, are required to be included in its articles in order to constitute it a private company;
(ii) include all the provisions, which are required to be contained in the articles of a public company;
and
(iii) remove all the provisions which are inconsistent with the requirements of a public company.
The company may alter any number of articles or alternatively adopt a new set of articles. The resolution
altering the articles must contain full text of all the alterations.
2. Hold the general meeting and have the aforementioned special resolutions passed.
3. Within thirty days of passing of the special resolutions, file the following documents electronically:
(i) e-form No. 23 with copy of resolution, along with explanatory statement under Section 173 and
amended copy of Articles of Association and Memorandum of Association as attachment.
(ii) A prospectus as attachment with e-form 62 pursuant to Section 44 of Companies Act, 1956 stating
the matters specified in Part I of Schedule II to the Companies Act, 1956 and setting out reports
specified in Part II of that Schedule. The said Parts I and II shall have effect subject to the provisions
contained in Part III of that Schedule. Alternatively, it can file a statement in lieu of prospectus which
should be in the form and contain the particulars set out in Part I of Schedule IV to the Act and in
cases mentioned in Part II of that Schedule, it should set out the reports specified therein as
attachment. The said Parts I and II shall have effect subject to the provisions contained in Part III of
that Schedule [Refer Section 44(2)].
4. If the number of members of the company is below seven, appropriate steps should be taken to increase
the number to at least seven (Refer Section 12).
5. If the number of directors of the company is two, the number of directors should be increased to at least
three (Refer Section 252).
6. Obtain from the Registrar of Companies, fresh Certificate of Incorporation consequent upon conversion
of the company into a public limited company.
7. Have fresh copies of the altered memorandum and articles of association printed incorporating the
changes or effect changes in all copies of the memorandum and articles of association lying in the
office of the company, and in letter heads, invoice forms, receipt forms, all other stationery items, and at
every other place where the name of the company appears.
8. Issue, if necessary, a general notice in newspapers informing members and all other concerned persons
and public at large that the company has become a public company and its name has been changed
from ............... Pvt. Ltd. to ................ Limited with effect from ...............
(For specimen of the general notice of the company becoming a public company, for publication in
newspapers, please see Annexure VII at the end of this study)
9. Inform all concerned persons/authorities about the conversion of the company from private company to
public company and about the change of its name, particularly to the Central Excise authorities, income
tax authorities, Sales tax authorities in various States, Customs authorities, Chief Inspector of Factories,
Regional Provident Fund Commissioner, other regulatory authorities, suppliers of raw materials,
customers, banks etc.
28 PP-ACL&P

10. Arrange for a new Common Seal and have the same adopted at a meeting of the Board of directors of
the company and keep both the old and the new Common Seals in safe custody under lock and key.
11. To have stationery printed with the new name and/or affix rubber stamp of the new name on all the
existing stationery items including the share certificates blanks.
12. Have painted the new name of the Company on all the sign boards wherever they are displayed.
It is important to note that the company becomes a public limited company with effect from the date of passing
the special resolution to that effect but the change of name of the company consequent upon deletion of the
word Private shall be effective from the date of issue of the fresh Certificate of Incorporation by the Registrar of
Companies.
It is to be noted that no new company comes into existence by conversion. Only an already existing company is
converted from private to public or vice versa. [All India Reporter v. Ram Chandra, AIR 1961 Bom. 292].

Status of Deemed Public Company after commencement of Companies (Amendment) Act, 2000
Earlier, a private company could convert itself into a public company by operation of law under Section 43A.
With the addition of Sub-section (11) to Section 43A the concept of deemed public company has been done
away with. Hence, after the commencement of the Companies (Amendment) Act, 2000, a private company
cannot automatically become a public company on account of Section 43A.
Accordingly, if a company which had become deemed public company by virtue of Section 43A of the Act,
decides to become a private company after the commencement of the Amendment Act, such company shall
pass an ordinary resolution for change in its name in the memorandum of association. Further, it shall pass a
special resolution for alteration of its Articles of Association to contain provisions as per Section 3(1)(iii)
including the newly inserted clause (d) pertaining to prohibition on invitation and acceptance of deposits.
Thereafter, the company shall inform the ROC that it has become a private company and Registrar
shall substitute the words Private Company for the words Public Company in the name of the company
and make necessary alterations in the certificate of incorporation within four weeks from the date of the
application.
Alternatively, if the company (i.e. deemed public company) decides to remain a public company then such
deemed public company shall have to increase its number of directors to at least three, and its members at least
upto seven and alter its articles of association as applicable to a public company.
Further, pursuant to sub-clause (c) of clause (iv) of Section 3(1) of the Act as amended vide Companies
(Amendment) Act, 2000, a private company which is a subsidiary of a company which is not a private
company shall become a public company on and from the commencement of the Amendment Act i.e. 13th
December, 2000. Therefore, a private company which is subsidiary of a public company shall be a public
company.

Consequences of Non-compliance of Section 3(1)(iii) of the Companies Act, 1956


Where the provisions, under clause (iii) of Sub-section (1) of Section 3 of the Companies Act, 1956, are required
to be included in the articles of a company in order to constitute a private company, but default is made in
complying with any of those provisions, the company shall cease to be entitled to the privileges and exemptions
conferred on private companies, by or under the Act and the Act shall apply to the company as if it was not a
private company [Refer Section 43]. However the Central Government, on being satisfied that the infringement
of these conditions was accidental or due to inadvertence or that on other grounds, it is just and equitable to
grant relief, to the company, it may relieve the company from consequences of such default.
Lesson 1 Company Formation and Conversion 29

16. CONVERSION OF PUBLIC COMPANY INTO A PRIVATE COMPANY


Section 3(1)(iii) of the Companies Act, 1956 defines a private company as a company which has a minimum
paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles of
association:
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including -
(i) persons who are in the employment of the company; and
(ii) persons who, having been formerly in the employment of the company, were members of the company
while in that employment and have continued to be members after the employment ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company.
(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their
relatives.
In view of the above provisions of the Companies Act, 1956, a public company may become a private company
if its membership is within the limits in sub-clause (b) of clause (iii) of Sub-section (1) of Section 3 of the Act, as
mentioned above. Such a company is required to take the following procedural steps:
1. Hold a meeting of its Board of directors to consider and approve the proposal for conversion of public
company into private company.
(For specimen of notice of the Board meeting, please see Annexure VIII at the end of this study).
The following resolutions must be passed at the meeting:
(i) To approve the proposal for conversion of the company into private company.
(ii) To fix time, date and venue for holding an extraordinary general meeting of the company.
(iii) To approve notice for the general meeting along with the explanatory statement as required under
Section 173 (2) of the Act. The notice for the general meeting must contain text of the special
resolutions, which will be required to be passed at the general meeting. The notice of the general
meeting must contain text of the following resolutions, which will be required to be passed at the
meeting:
(a) special resolution for altering the articles of the company, as required under Section 31 of the
Companies Act, 1956, so as to include therein restrictions, limitation and prohibition specified in
Section 3(1)(iii) of the Act converting the public company into a private company.
(For specimen of special resolution for alteration of articles of the company to include restriction,
limitation and prohibition, please see Annexure IX at the end of this study).
(b) special resolution for changing the name of the company as required under proviso to Section
21 of the Act. (See Annexure V)
(c) special resolution for altering the memorandum of association (name clause) of the company in
accordance with Section 16 of the Act. (See Annexure VI)
(iv) To authorise the company secretary or some competent officer to issue the notice of the general
meeting on behalf of the Board. (Specimen of Board resolution for calling a general meeting is given
at Annexure X).
2. Hold general meeting and have the aforementioned special resolutions passed.
30 PP-ACL&P

3. Within thirty days of passing of the special resolutions, file e-form 23 with copy of resolution along with
explanatory statement under Section 173 and amended copy of Articles of Association as attachment
along with prescribed filing fee payable in the mode described earlier.
(For specimen of e-form 23, registration and resolutions and agreements, please refer the CD provided
along with the Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
4. If the number of members of the company is above fifty, appropriate steps should be taken to reduce the
number to fifty or below.
5. Send to the stock exchanges where the securities of the company are listed, six copies including one
certified copy of the amendments to the articles of association of the company as soon as they been
approved by the company in general meeting.
6. In accordance with the proviso to Sub-section (1) of Section 31 of the Companies Act, 1956, no alteration
made in the articles of association of a company, which has the effect of converting a public company
into a private company, shall be effective unless such alteration has been approved by the Central
Government. Now, the power has been delegated to Registrar of Companies. Thereafter, an application
in e-form 1B as prescribed in the Companies (Central Governments) General Rules and Forms
(Amendment) Rules, 2006, along with the minutes of the members meeting and prescribed application
fee, will have to be made, within three months from the date of passing of the special resolution for
alteration of the articles, for obtaining the Central Governments approval to the alteration of the articles
of the company [Rule 4(B)].
(For specimen of e-form 1B, application for Central Governments approval for conversion of public
company into private company, please refer the CD provided along with the Study Material or see the
link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
The application in electronic Form 1B must have scanned/digitized copy of the following duly attached
with it:
(i) A copy of the minutes of the meeting of members where resolution has been passed.
(ii) Copy of any approval order obtained from the concerned authorities (such as RBI, IRDA, SEBI etc.)
or the concerned department.
7. If the Registrar of Companies so directs, publish a notice in newspaper(s) as per his direction.
8. Send to the stock exchanges where the securities of the company are listed, three copies of proceedings
of the general meeting at which the special resolution was passed and also three copies of the newspaper
advertisement of notice.
9. After the alteration of the articles has been approved by the Central Government, a printed copy of the
altered articles of the company should be filed with the concerned Registrar of Companies in e-form 62
within one month of the date of receipt of the order of approval [Refer Section 31(2A)].
10. Surrender to the Registrar, the Certificate of Incorporation of the company in order to obtain fresh
Certificate of Incorporation consequent upon change of name on conversion of the company into a
private company [Refer Section 23(1)].
11. Change the name of the company in all copies of the memorandum and articles of association lying in
the office of the company, letter heads, invoice forms, receipt forms, all other stationery items, common
seal of the company, sign boards and at every other place where the name of the company appears.
12. If required, issue a general notice in newspapers informing members and public at large that the company
has been converted into a private limited company and its name has been changed from ........... Limited
to ............ Private Limited with effect from ...............
Lesson 1 Company Formation and Conversion 31

(For specimen of the general notice for publication in newspapers that the company has become a
private company, please see Annexure XI at the end of this study).
It is important to note that the company becomes a private company with effect from the date of approval of the
Central Government under the proviso to Section 31 of the Companies Act, 1956, the change in the name of the
company shall be effective from the date of issue of fresh Certificate of Incorporation consequent upon conversion
into a private company, by the Registrar of Companies.

17. CONVERSION OF SOLE PROPRIETOR CONCERN INTO LIMITED COMPANY


After the company is incorporated, it may acquire the assets and liabilities of any running business as per terms
and conditions of an agreement that may be entered into by and between the company and the seller of the
existing business.
In a sole proprietory concern, it is the sole proprietor, who is the sole owner of the business of his proprietory
concern. Therefore, he owns all the assets, movable and immovable, of the concern and he is liable to satisfy all
the liabilities of his sole proprietory concern. He has the absolute discretion, either to continue running his
business or sell the same to another person or to a company.
Since the sole proprietor of a sole proprietory concern is only one person, who constitutes the sole proprietory
concern, he alone cannot form either a private limited company, which requires at least two persons to subscribe
to its memorandum of association, nor can he form a public limited company, which requires at least seven
persons to subscribe to its memorandum of association, as required under Section 12 of the Companies Act,
1956.
However, if and when the sole proprietor of a sole proprietory concern proposes to be a part of a private limited
company or a public limited company, he has to propose and sell his project and idea relating thereto to other
persons, in the case of a private limited company, to at least one more person and in the case of a public limited
company, to at least six other persons. When he is in a position to muster the association of the required number
of persons and he has a viable project to be executed by the proposed company, he may proceed to form a
limited company as per procedure laid down in Section 12 of the Companies Act, 1956. The persons, who take
steps for the formation of a company, are known as promoters of the company in their capacity as subscribers
to the memorandum of association of the company.
After having done the aforesaid exercise, the sole proprietor along with his associates should take the procedural
steps enumerated earlier for the formation and registration of the company.
It is advisable that one of the main objects of the proposed company shall be to take over the assets and
liabilities of the sole proprietory business as a going concern. While deciding on the conversion, the tax implications
of such conversion has to be borne in mind.

18. CONVERSION OF A PARTNERSHIP FIRM INTO A LIMITED COMPANY


The company may acquire the assets and liabilities of any running business, which may belong to an individual,
or to a sole proprietory concern, or to a partnership firm, or for that matter, to a limited company, in accordance
with the terms and conditions of an agreement that may be entered into by and between the company and the
seller(s) of the existing business.
Such an agreement may be made, before the incorporation of the company, by the promoters of the company
with the seller of the business, which, on incorporation, may be ratified by the company through its authorised
agent or representative. However, the promoters are duty bound to ensure that such pre-incorporation agreements
are fair and in the interest of the company, and if the promoters make any profit or take any undue advantage
from such agreements, they are liable to compensate the company to the extent the company suffers any loss.
If a particular partnership firm has the required number of persons, who may form a limited company as per the
32 PP-ACL&P

requirements of the Companies Act, they may become subscribers to the memorandum and also the promoters
of the company. The assets and liabilities of the firm can be taken over by the company on incorporation on the
basis of their valuation done by experts and the promoters or the erstwhile partners of the firm are allotted
shares in the company according to the value of their shares in the firm.
On incorporation of the company, the assets and liabilities of the partnership firm may be taken over by the
company, as per terms and conditions of the agreement executed by and between the promoters of the company,
which is ratified by the company on its incorporation or by and between the company after its incorporation and
the partners of the firm, in their capacity as partners of the firm and not in their capacity as subscribers to the
memorandum of association of the company or as members of the company.
After all the assets and liabilities of the partnership firm have been taken over by the company and the partners
have been paid by the company either in cash or in the form of shares in the company, the existence of the firm
comes to an end.
The company is a separate legal entity, which is quite distinct and independent of its members. Members of a
company may come and go but the company continues to exist till it is wound up or is declared defunct by the
Registrar of Companies, according to due process of law. The mere fact that the assets and liabilities of a
partnershipfirm have been taken over by a company and its partners have either been paid in cash or have
been allotted shares in the companydoes not by itself mean that the companyretainsits character of partnership.
[Official Liquidator v. Ram Swarup (1997) 26CLA 90 (All)].
If and when the partners of a partnership firm propose to form a private limited company or a public limited
company, they have to ensure that their number is sufficient to form such a company as per provisions of
Section 12 of the Companies Act, 1956. After having mustered the required number, they may proceed to form
a limited company as per procedure laid down in Section 12 of the Companies Act, 1956.
The persons, who take steps for the formation of a company, are known as promoters of the company. They
subscribe to the memorandum of association of the company and on incorporation, their names are entered in
the register of members of the company as they shall be deemed to have agreed to become members of the
company as per provisions of Section 41(1) of the Companies Act, 1956.
After having decided to form a company to take over the business of their partnership firm, the partners should
take the following procedural steps for the formation and registration of the company:

19. PROCEDURE FOR CONVERSION OF A SOLE PROPRIETOR CONCERN OR PARTNERSHIP


FIRM INTO A LIMITED COMPANY
(A) An existing business (that is sole proprietorship or partnership) can be converted into a company in any of
the following ways:
(a) by outright sale;
(b) by making partners of the firm the only shareholders of the newly incorporated company;
(c) a company becoming a partner of the firm which will be dissolved thereafter;
(d) by amalgamation under Sections 391 to 394 of the Companies Act, 1956;
(e) by registration of existing joint stock companies under the Companies Act (Section 567).
(B) In cases of items (a), (b) and (c), following procedure should be followed:
(1) The existing business should be converted into a partnership firm and the newly incorporated company
be admitted as its partner.
(2) At the time of forming the new company, it should be ensured that the proprietor of the existing business
Lesson 1 Company Formation and Conversion 33

and any other individual are the subscribers to that companys memorandum of association, thereupon
that other individual must also be admitted as a partner of the converted firm.
(3) Distribution of all assets and liabilities of the firm to one of the partners who will pay the difference to
other partners must be provided in the partnership deed.
(4) It must be ensured that the memorandum of association of the newly formed company includes a
clause permitting the company to acquire the undertakings of an existing business.
(5) It must also be ensured that the articles of association of the newly formed company gives power to its
directors to enter into agreement facilitating the acquisition of business.
(6) An agreement with the directors of the newly formed company for facilitating the acquisition of the
partnership firm must be entered into.
(7) A copy of the agreement must be filed with the Registrar within 30 days of entering into the agreement
(Section 192), after paying the requisite fee as prescribed under Schedule X to the Companies Act,
1956.
(8) Thereupon a Board resolution for allotment of shares to the other partners of the firm as consideration
of such acquisition should be passed.
(9) A return of allotment in e-form 2 along with the attachments (please refer the CD provided along with the
Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html) should
be filed with the Registrar within 30 days of making the allotment (Section 75).
(10) If the partnership firm being a joint stock company within the meaning of Section 566 wants to be
registered as a company, it shall file e-form 1A and ascertain availability of name.
Thereafter, the following documents should be delivered to the Registrar of Companies:
(i) an application in e-form No. 37 (please refer the CD provided along with the Study Material or see
the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html);
(ii) a list showing the names, addresses and occupations of all persons who on a day not more than 6
clear days before the day of registration were members of the company and the shares or stock
held by each one of them respectively, distinguishing each share by its number in case the shares
are numbered;
(iii) a copy of the partnership deed;
(iv) a statement containing the following particulars:
(a) the nominal share capital of the company and the number of shares into which it is divided or
the amount of stock of which it consists;
(b) the number of shares taken and the amount paid on each share;
(c) the name of the company and the addition of the word Limited or Private Limited as its last
words;
(d) a copy of the resolution declaring the amount of guarantee if you want to register it as a guarantee
company (Section 567).

20. CONVERSION OF COMPANY INTO LIMITED LIABILITY PARTNERSHIP


In accordance with Section 56 and 57 of Limited Liability Partnership Act, 2008, a private company and an
unlisted public company may convert into a limited liability partnership (LLP) in accordance with the provisions
of Chapter X and complying with Third Schedule and Fourth Schedule respectively.
34 PP-ACL&P

The Registrar on satisfying that private company or an unlisted public company has complied with the provisions,
shall register the documents submitted and issue a certificate of registration the limited liability partnership is, on
and from, the date specified in the Certificate, registered under the Act.
LLP is required to inform the concerned Registrar of Companies about the conversion and of the particulars of
the LLP in Form No. 14 under the Limited Liability Partnership Rules, 2009 within 15 days of the date of registration.
(For specimen of Form 14, please refer the CD provided along with the Study Material or see the link http://
www.mca.gov.in/LLP/pdf/LLPRulesasnotified.pdf).

21. CONVERSION OF AN INTER-STATE COOPERATIVE SOCIETY INTO A PRODUCER COMPANY


An Inter-State Co-operative Society means a Multi-State Co-operative Society as defined in Section 3(p) of
Multi-State Co-operative Societies Act, 2002 and includes a national co-operative society and a federal co-
operative.
Section 581J explains the provisions relating to conversion of an existing co-operative society into a Producer
Company.
Accordingly, any inter-state co-operative society with objects not confined to one State may make an application
to the Registrar for registration as Producer Company. The eligibility for making an application for conversion of
inter-state co-operative society is as follows:
(i) Inter State Co-operative Society with objects not confined to one state may make an application to
Registrar for registration as producer company under Part IX-A of the Act.
(ii) A Co-operative Society formed by producers, by Federation or Union of Co-operative Societies of
producers or Co-operatives of producers, registered under any law for the time being in force which has
extended its objects outside state, either directly or through a union or federation of co-operatives of
which it is a constituent, as the case may be, and any Federation of Unions of such Co-operatives,
which has so extended any of its objects or activities outside the State, may make an application for
registration as a Producer Company.
The procedure for conversion is as follows:
(1) Every application for conversion shall be accompanied by:
(a) a copy of the special resolution of not less than two third of total members of Inter-State Co-Operative
Society, for its incorporation as a producer company under this Act.
(b) a statement showing
(i) names and addresses or the occupation of the directors and chief executive, if any, by whatever
name called.
(ii) list of members of such Inter-State Co-operative Society.
(c) a statement indicating that the Inter-State Co-operative Society is engaged in any one or more of
the objects specified in Section 581B.
(d) a declaration by two or more directors of the Inter-State Co-operative Society certifying that particulars
given in (a) to (c) above are correct.
(2) On compliance with the requirements for conversion, the Registrar shall, within a period of thirty days of
the receipt of application, certify under his hand that the Inter-State Co-operative Society applying for
registration is registered and thereby incorporated as a Producer Company under Part IXA.
(3) When an Inter-State Co-operative Society is registered as a Producer Company, the words Producer
Company Limited shall form part of its name with any word or expression to show its identity preceding it.
Lesson 1 Company Formation and Conversion 35

(4) Upon registration the Inter-State Co-operative Society shall stand transformed into a Producer Company,
and thereafter shall be governed by the provisions of Part IXA to the exclusion of the law by which it was
earlier governed, save in so far as anything done or omitted to be done before its registration as a
producer company and notwithstanding anything contained in any other law for the time being in force,
no person shall have any claim against the co-operative institution or the company by reason of such
conversion or transformation.
(5) The Registrar of Companies who registers the company shall forthwith intimate the Registrar with whom
the erstwhile inter-state co-operative society was earlier registered for appropriate deletion of the society
from its register.

22. RECONVERSION OF PRODUCER COMPANY TO INTER-STATE CO-OPERATIVE SOCIETY


[SECTION 581ZS]
Any producer company, being an erstwhile Inter-State Co-operative Society, may make an application to the
High Court of the State or Union Territory in which the registered office of the company is situated, for its
reconversion to the Inter-State Co-operative Society:
(a) after passing a resolution in general meeting by not less than two third of its members present and
voting, or
(b) on request by its creditors representing three-fourth value of its total creditors.
On receipt of application, the High Court shall direct holding meeting of its members or such creditors, as the
case may be, to be conducted in such manner as it may deem necessary.
If a majority in number representing three fourth in value of the creditors or members, as the case may be,
present and voting in person at such meeting agree for reconversion, the High Court if sanction such reconversion,
then such reconversion will be binding on all members and all the creditors, as the case may be, and also on the
company which is being converted.
No order sanctioning reconversion shall be made by the High Court unless the Court is satisfied that the company
or any other person making the application has disclosed to the Court all material facts relating to the company,
such as the latest financial position of the company, the latest auditors report on the accounts of the company, the
pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like.
An order of the High Court sanctioning the reconversion shall have no effect until a certified copy of the order
has been filed with the Registrar. A copy of every order made by the Court shall be annexed to every copy of the
memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the
case of a company not having a memorandum, to every copy so issued to the instrument constituting or defining
the constitution of the company.
The High Court may, at any time, after an application for reconversion has been made to it, stay the commencement
or continuation of any suit or proceeding against the company on such terms as it thinks fit.
Every Producer Company which has been sanctioned reconversion by the High Court, shall make an application,
under the Multi-State Co-operative Societies Act, 2002 or any other law for the time being in force for its registration
as multi-state co-operative society or co-operative society. Such application shall be made within 6 months of
order of sanction by the High Court.
The Registrar of Companies shall thereafter, strike off the name of the Producer Company from its register.

23. STRIKE OFF NAME OF PRODUCER COMPANY


Section 581ZP of the Companies Act, 1956 states that the Registrar can after making an inquiry strike off the
name of a company where the company:
36 PP-ACL&P

(i) has failed to commence its business within one year of its registration
(ii) ceases to transact business
(iii) is no longer carrying on its objectives
(iv) is not following the mutual assistance principles.
The Registrar shall, before passing the order, issue a show cause notice to the company with a copy to the
directors and give a reasonable opportunity of being heard. Any member of Producer Company aggrieved by an
order may make an appeal within sixty days of passing the order. The said appeal shall be made before CLB.

24. COMMENCEMENT OF BUSINESS

I. Commencement of Business by a Company


Section 149 of the Companies Act, 1956 imposes certain restrictions on the commencement of business and
exercise of borrowing powers by a public company having a share capital.
Sub-section (7) exempts private companies from the provisions of this section, which means that a private
company may commence business and exercise borrowing powers immediately on its incorporation.
The restrictions contained in Section 149 are applicable only to companies having share capital. A company
not having a share capital may commence business and exercise borrowing powers immediately on
incorporation.
When a private company is converted into a public company, it need not obtain a certificate of commencement
of business on its conversion because the company had already commenced business on its incorporation as a
private company.
Commencing business refers not only to business for which the company was incorporated but also to any
transaction including sale or purchase of goods or rendering of any service.
A. Procedure for Commencement of Business, where the company has issued prospectus
1. Issue the prospectus.
2. Minimum subscription
2.1. Minimum subscription amount mentioned in the prospectus should have been received in cash.
2.2. In order that a transaction between a company and allottee of shares may amount to payment in cash
each party must have an actual demand on the other for present payment.
3. The directors who have applied or contracted to take up shares should pay the amount they are liable to
pay in cash, at least a proportion equal to the proportion payable on application and allotment of shares
offered for public subscription.
4. Listing: Where the shares are to be quoted on the stock exchange necessary application must be
submitted to it and approval obtained within the prescribed time.
5. Shares issued for cash to the public should be allotted.
6. Declaration: File e-Form 19 of the Companies (Central Governments) General Rules and Forms, 1956
on the stamp paper of requisite value as required by the Stamp Act of the respective states with the
Registrar. This form is regarding a declaration of compliance with the provisions of section 149 clauses
(a), (b) and (c) of sub section (1) and it has to be duly verified by one of the directors or the secretary or
where the company has not appointed a secretary, by the secretary in whole-time practice by signing it
digitally. The form is to be filed electronically. However, in case stamp duty is not paid electronically
Lesson 1 Company Formation and Conversion 37

through MCA portal, the company is required to deliver simultaneously the original stamped physical
copy of the uploaded e-Form along with a copy of challan/ receipt in the concerned office of ROC failing
which such e-Form shall be put into Waiting for user clarification in terms of Regulation 17 of the
Companies Regulations, 1956 (for specimen of e-form 19, please refer the CD provided along with the
Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
7. Obtain the certificate for commencement of business from the Registrar. The certificate is conclusive
evidence that the company is entitled to commence business.
B. Procedure for Commencement of Business, where the Company has not issued any prospectus
1. Directors must pay on the shares taken up or contracted against cash payment, or have paid a proportion
equal to the proportion payable on application and allotment.
2. Statement in lieu of prospectus:
File a statement in lieu of the prospectus. The statement shall be in the prescribed form and contain
particulars given in Part I of Schedule III to the Act. The statement will be accompanied by reports
specified in Part II of Schedule III of the Act.
File the statement at least 3 days before the first allotment.
3. Declaration: File a declaration in e-Form 20 on the stamp paper of requisite value as required by the
Stamp Act of the respective states, with the Registrar. This form is regarding declaration that clause (b)
of sub-section (2) of section 149 has been complied with and it has to be duly verified by one of the
directors or the secretary or where the company has not appointed a secretary, by the secretary in
whole-time practice by signing it digitally. The form is to be filed electronically. However, in case stamp
duty is not paid electronically through MCA portal, the company is required to deliver simultaneously the
original stamped physical copy of the uploaded e-Form along with a copy of challan/ receipt in the
concerned office of ROC failing which such e-Form shall be put into Waiting for user clarification in
terms of Regulation 17 of the Companies Regulations, 1956 (for specimen of e-form 20, please refer
CD provided along with the Study Material or see the link http://www.mca.gov.in/MCA21/
Download_eForm_choose.html).
4. The company will then obtain the certificate for commencement of business from the Registrar. (For
specimen of Certificate of Commencement of Business, please see Annexure XII at the end of the
study).

II. Commencement of New Business by an Existing Company


New business defined
According to a clarification issued by the Ministry of Corporate Affairs (the then Department of Company Affairs),
new business means a business which is not germane to the existing business carried on by the company.
Every company has, therefore, to judge with the standard laid down by the Ministry of Corporate Affairs (the then
Department of Company Affairs), whether the business it proposes to commence falls within the meaning of the
term germane.
In accordance with the provisions of Section 13(1) of the Companies Act, 1956, every company shall state in its
memorandum of association,
(i) the name of the company;
(ii) state in which the registered office of the company is to be situate;
(iii) liability of its members is limited;
38 PP-ACL&P

(iv) objects of the company; and


(v) the States to which the objects of the company extend.
According to clause (c) and (d) of Sub-section (1) of Section 13 of the Act, the objects of the company are
classified as
(i) In case of a company in existence immediately before the commencement of the Companies
(Amendment) Act, 1965, the objects of the company.
(ii) In case of a company formed after such commencement -
(i) the main objects of the company to be pursued by the company on its incorporation and objects
incidental or ancillary to the attainment of the main objects; and
(ii) other objects of the company not included in sub-clause (i).
Commencement of new business
The provisions of Section 149 of the Act with regard to commencement of new business are not applicable to a
private company. The requirement of obtaining the certificate for commencement of business applies to :
(a) A public company having a share capital, which has issued a prospectus inviting the public to subscribe
for its shares; and
(b) A public company having a share capital, which has not issued a prospectus inviting the public to
subscribe for its shares.
In case of companies formed after the commencement of the Companies (Amendment) Act, 1965, If and when
such company decides to commence a new business i.e. a business included in the sub-clause other objects
in the objects clause of the memorandum of the company, it has to comply with the requirements of clause (b) of
Sub-section (2A) of Section 149 of the Act, which lays down that the company must
(i) approve the commencement of any such business by a special resolution passed in that behalf by it in
general meeting; and
(ii) file with the Registrar duly verified declaration by one of the directors or the secretary or, where the
company has not appointed a secretary, a secretary in whole-time practice, in the prescribed form, that
clause (i), or as the case may be, Sub-section (2B) of section 149 has been complied with.
If no such special resolution has been passed but the votes cast in favour of the proposal to commence such
business contained in the resolution moved in that general meeting, including the casting vote, if any, of the
chairman, by members who, being entitled so to do, exceed the votes, if any, cast against the proposal by
members so entitled and voting, the Central Government may, on an application made to it by the Board of
Directors of the company in this behalf, allow the company to commence such business as if the proposal had
been passed by a special resolution by the company in general meeting [Refer Sub-section (2B)].
In case of a company in existence immediately before the commencement of the Companies (Amendment) Act,
1965, all the objects were listed in one place. The explanation provided in the Section states that a company
shall be deemed to commence any business within the meaning of clause(a) (i.e. in respect of objects of a
company in existence before the commencement of the Amendment Act of 1965) if and only if it commences
any new business which is not germane to the business which it is carrying on at the commencement of the
Companies (Amendment) Act, 1965 in relation to any of the objects referred to in the said clause.

Procedure for Commencement of new business


Irrespective of whether the Pre-1965 company commences any business which is not germane to its existing
business or a Post -1965 company, which commences business in relation to its Other Objects as contained
Lesson 1 Company Formation and Conversion 39

in its Memorandum, the company has to follow the procedure laid down in Section 149 of the Act, which, in brief
is as under
1. The Board of directors of the company has to thoroughly scan the objects clause of the companys
memorandum of association, and if the Board comes to the conclusion that the proposed new business
is not germane to the existing business carried on by the company. The objects clause of the memorandum
has to be altered so as to include the new business.
2. The Board should then hold a meeting to
(i) resolve that the proposed new business be commenced in accordance with Section 149 and other
applicable provisions of the Companies Act, 1956;
(for specimen of Board resolution, please see Annexure XIII at the end of this study).
(ii) resolve that general meeting of the company be called and held for passing the required special
resolution required for the purpose and to fix time, date and venue for holding the same; and
(for specimen of Board resolution for calling the general meeting, please see Annexure X at the end
of this study).
(iii) approve notice of the general meeting along with the explanatory statement required to be annexed
to the notice as per requirement of Section 173(2) of the Act. The notice must contain the text of the
special resolution; and
(iv) authorise the company secretary or one of the directors to issue the notice for the general meeting.
3. Company secretary or director authorised to issue notice of the general meeting.
4. If the securities of the company are listed on one or more recognised stock exchanges, send
simultaneously to the stock exchanges, copy of the notice of the general meeting.
5. Hold the general meeting and have the special resolution passed.
(For specimen of special resolution for commencement of new business, please see Annexure XIV at
the end of this study).
Central Governments approval:-
According to section 149(2B), if a special resolution could not be passed but instead a resolution by a
simple majority of votes is passed in lieu of a special resolution, then the company should apply to the
Ministry of Corporate Affairs in e-form 65 as prescribed in the Companies (Central Governments) General
Rules and Forms (Amendment) Rules, 2006, for its approval.
The application should give all relevant information including justification and reasons for commencement
of the new business as well as reasons for the special resolution not having been passed, and must be
accompanied by
A certified true copy of the notice of the meeting and the explanatory statement;
A certified true copy of the resolution actually passed at the meeting;
A certified true copy of the memorandum and articles of association;
Particulars as to the number of members who attended the meeting either in person or by proxies,
manner of voting, the number of votes cast in favour and against the resolution;
Filing fees paid electronically.
6. File, within thirty days of the passing of the special resolution, with the Registrar of Companies e-form
No. 23 along with a certified copy of the special resolution together with a copy of the explanatory
40 PP-ACL&P

statement under Section 173 annexed to the notice of the general meeting along with the prescribed
filing fee.
7. File, within thirty days of the passing of the special resolution or before commencement of business,
whichever is earlier, a declaration duly stamped with the appropriate stamp duty, verified and signed by
one of the directors or the secretary or where the company has not appointed a secretary, by the
secretary in whole-time practice, duly authorised by the Board, in the e-form 20A prescribed in the
Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006 with the
prescribed filing fees. The form is to be filed electronically. However, in case stamp duty is not paid
electronically through MCA portal, the company is required to deliver simultaneously the original stamped
physical copy of the uploaded e-Form along with a copy of challan/ receipt in the concerned office of
ROC failing which such e-Form shall be put into Waiting for user clarification in term of Regulation 17
of the Companies Regulations, 1956. (For specimen of e-form 20A, please refer the CD provided along
with the Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
8. In case of listed companies, send to the stock exchanges, six copies, including one certified copy, of the
amendment to the memorandum of association of the company as soon as the same has been approved
by the company in general meeting.
9. In case of listed companies, send to the stock exchanges, three copies of proceedings of the general
meeting at which the special resolution was passed.
10. No certificate to commence new business is required under sub-section (2A). The company may
commence business at any time after the filing of the declaration.

25. PRE-INCORPORATION AGREEMENTS AND CONTRACTS


It is likely that due to non availability of a suitable name, lack of clarity among the promoters or for other reasons,
the formation of a company may take time. In the meanwhile, the promoters may enter into contracts on behalf
of proposed company, like purchase of land, ordering machinery, employing key personnel, investment tie up
etc. and also incur expenses relating to incorporation of the company. These must be ratified on the incorporation
of the company.
The Articles must authorize the directors to pay the expenses relating to registration of the company. The
directors do not have any implied power to incur pre-incorporation expenses.
As per section 15 of Specific Relief Act, 1963; if promoters have made a contract before incorporation of a
company for the purpose of the proposed company, and if the contract is warranted by the terms of incorporation,
the company may adopt and enforce the contract. The term warranted by the terms of incorporation means
within the scope of the companys objects as stated in the memorandum of the company. Thus, the contract
should be for the purposes of the company. As per section 19 of Specific Relief Act, 1963, if the pre-incorporation
contract is adopted or accepted by the company after its incorporation and if it is within the terms of incorporation,
the other party can also enforce the contract, if such acceptance was communicated to other party to the
contract.
However, pre-incorporation contracts are not binding upon the company, if these are not adopted or accepted by
the company after its incorporation. Adoption or acceptance of contracts practically means ratification of contract.
A Board resolution should be passed for adoption of pre-incorporation contracts at the first Board meeting of the
company. On passing such resolution, the contract shall be binding on the company.
The procedure for ratification of pre-incorporation contract is as under:-
See that the power to enter and adopt pre-incorporation contracts is given in the objects, incidental or ancillary
to the attainment of the main objects clause of the memorandum of the company.
Lesson 1 Company Formation and Conversion 41

See that the articles also give power to the directors to adopt such pre-incorporation contracts in the board
meeting.
Prepare a statement of the pre-incorporation contracts giving the amount involved in the each contract separately.
Convene the first board meeting after giving notice to all the directors of the company as per section 286 and
place the above mentioned statement before the board meeting.
The statement should be initialed by the Chairman of the Board meeting and then pass a resolution adopting the
pre-incorporation contract. (For specimen of the resolution adopting pre-incorporation contracts please see
Annexure XVI at the end of this Study).
If the company is public company, then file a copy of the resolution with the concerned Registrar of Companies
along with the statement in lieu of prospectus in e-form 62.
The said e-form is to be digitally signed by the managing director or director or manager or secretary of the
company duly authorised by the Board of Directors.

ANNEXURES
ANNEXURE I
NAME AVAILABILITY GUIDELINES, 2011
(Relevant Part)
In determining whether a proposed name is identical with another, the following shall be disregarded:
(i) The words Private, Pvt, Pvt., (P), Limited, Ltd, Ltd., LLP, Limited Liability Partnership;
(ii) The words appearing at the end of the names company, and company, co., co, corporation, corp,
corpn, corp.;
(iii) The plural version of any of the words appearing in the name;
(iv) The type and case of letters, spacing between letters and punctuation marks;
(v) Joining words together or separating the words, as this does not make a name distinguishable from a
name that uses the similar, separated or joined words. Such as Ram Nath Enterprises Pvt. Ltd. will be
considered as similar to Ramnath Enterprises Pvt. Ltd.;
(vi) The use of a different tense or number of the same word, as this does not distinguish one name from
another. Such as, Excellent Industries will be similar to Excellence Industries and similarly Teen Murti
Exports Pvt. Ltd. will be to Three Murti Exports Pvt. Ltd.;
(vii) Using different phonetic spellings or spelling variations, as this does not distinguish one name from
another. For example, J.K. Industries limited is existing then J and K Industries or Jay Kay Industries or
J n K Industries or J & K Industries will not be allowed. Similarly if a name contains numeric character
like 3, resemblance shall be checked with Three also;
(viii) The addition of an internet related designation, such as .COM, .NET, .EDU, .GOV, .ORG, .IN, as this
does not make a name distinguishable from another, even where (.) is written as dot;
(ix) The addition of words like New, Modern, Nav, Shri, Sri, Shree, Sree, Om, Jai, Sai, The, etc., as this does
not make a name distinguishable from an existing name such as New Bata Shoe Company, Nav Bharat
Electronic etc. Similarly, if it is different from the name of the existing company only to the extent of
adding the name of the place, the same shall not be allowed. For example, Unique Marbles Delhi
Limited can not be allowed if Unique Marbles Limited is already existing;
42 PP-ACL&P

Such names may be allowed only if no objection from the existing company by way of Board resolution
is produced/ submitted;
(x) Different combination of the same words, as this does not make a name distinguishable from an existing
name, e.g., if there is a company in existence by the name of Builders and Contractors Limited, the
name Contractors and Builders Limited should not be allowed;
(xi) Exact Hindi translation of the name of an existing company in English especially an existing company
with a reputation. For example, Hindustan Steel Industries Ltd. will not be allowed if there exists a
company with name Hindustan Ispat Udyog Limited;
In addition to above, the user shall also adhere to following guidelines:
(i) It is not necessary that the proposed name should be indicative of the main object.;
(ii) If the Companys main business is finance, housing finance, chit fund, leasing, investments, securities
or combination thereof, such name shall not be allowed unless the name is indicative of such related
financial activities, viz., Chit Fund/ Investment/Loan, etc.;
(iii) If it includes the words indicative of a separate type of business constitution or legal person or any
connotation thereof, the same shall not be allowed. For eg: cooperative, sehkari, trust, LLP, partnership,
society, proprietor, HUF, firm, Inc., PLC, GmbH, SA, PTE, Sdn, AG etc.;
(iv) Abbreviated name such as BERD limited or 23K limited cannot be given to a new company. However
the companies well known in their respective field by abbreviated names are allowed to change their
names to abbreviation of their existing name (for Delhi Cloth Mills limited to DCM Limited, Hindustan
Machine Tools limited to HMT limited) after following the requirement of Section 21 of the Companies
Act, 1956. Further, if the name is only a general one like Cotton Textile Mills Ltd., or Silk Manufacturing
Ltd., and not specific like Calcutta Cotton Textiles Mills Limited or Lakshmi Silk Manufacturing Company
Limited, the same shall not be allowed;
(v) If the proposed name is identical to the name of a company dissolved as a result of liquidation proceeding
should not be allowed for a period of 2 years from the date of such dissolution since the dissolution of
the company could be declared void within the period aforesaid by an order of the Court under section
559 of the Act. Moreover, if the proposed name is identical with the name of a company which is struck
off in pursuance of action under section 560 of the Act, then the same shall not be allowed before the
expiry of 20 years from the publication in the Official Gazette being so struck off since the company can
be restored anytime within such period by the competent authority;
(vi) If the proposed names include words such as Insurance, Bank, Stock Exchange, Venture Capital,
Asset Management, Nidhi, Mutual fund etc., the name may be allowed with a declaration by the
applicant that the requirements mandated by the respective Act/ regulator, such as IRDA, RBI, SEBI,
MCA etc. have been complied with by the applicant;
(vii) If the proposed name includes the word State, the same shall be allowed only in case the company is a
government company. Also, if the proposed name is containing only the name of a continent, country, state,
city such as Asia limited, Germany Limited, Haryana Limited, Mysore Limited, the same shall not be allowed;
(viii) If the proposed name contains any word or expression which is likely to give the impression that the
company is in any way connected with, or having the patronage of, the Central Government, any State
Government, or any local authority, corporation or body constituted by the Central or any State Government
under any law for the time in force, unless the previous approval of Central Government has been
obtained for the use of any such word or expression;
(ix) If a foreign company is incorporating its subsidiary company, then the original name of the holding
Lesson 1 Company Formation and Conversion 43

company as it is may be allowed with the addition of word India or name of any Indian state or city, if
otherwise available;
(x) Change of name shall not be allowed to a company which is defaulting in filing its due Annual Returns
or Balance Sheets or which has defaulted in repayment of matured deposits and debentures and/or
interest thereon;

ANNEXURE II
SCHEDULE X
(See Sections 574 and 611)
TABLE OF FEES TO BE PAID TO THE REGISTRAR
I. In respect of a company having a share capital: Amount of fees
to be paid (`)
1. For registration of a company whose nominal share capital does not exceed 4,000
` 1,00,000
2. For registration of a company whose nominal share capital exceeds ` 1,00,000, the
above fee of ` 4,000 with the following additional fees regulated according to the
amount of nominal capital:
(a) for every ` 10,000 of nominal share capital or part of ` 10,000 after the first 300
` 1,00,000
upto ` 5,00,000
(b) for every ` 10,000 of nominal share capital or part of ` 10,000 after the first 200
` 5,00,000 upto ` 50,00,000
(c) for every ` 10,000 of nominal share capital or part of ` 10,000 after the first 100
` 50,00,000 upto ` 1 crore
(d) for every ` 10,000 of nominal share capital or part of ` 10,000 after the first 50
` 1 crore
Provided that where the additional fees, regulated according to the amount of the
nominal capital of a company, exceeds a sum of rupees two crores, the total amount
of additional fees payable for the registration of such company shall not, in any case,
exceed rupees two crores.
3. For filing a notice of any increase in the nominal share capital of a company, the
difference between the fees payable on the increased share capital on the date of
filing the notice for registration of company and the fees payable on existing authorised
capital, at the rates prevailing on the date of filing the notice.
4. For registration of any existing company, except such companies as are by this Act
exempted from payment of fees in respect of registration under this Act, the same fee
is charged for registering a new company.
5. For filing, registering or recording any document by this Act required or authorised to
be filed, registered or recorded
(a) in respect of a company having a nominal share capital of less than ` 1,00,000. 100
44 PP-ACL&P

(b) in respect of a company having a nominal share capital of ` 1,00,000 or more but 200
less than ` 5,00,000.
(c) in respect of a company having a nominal share capital of ` 5,00,000 or more but 300
less than ` 25,00,000.
(d) in respect of a company having a nominal share capital of ` 25,00,000 or more 500
6. For making a record of or registering any fact by this Act required or authorised
to be recorded or registered by the Registrar
(a) in respect of a company having a nominal share capital of less than ` 1,00,000 100
(b) in respect of a company having a nominal share capital of ` 1,00,000 or more but 200
less than ` 5,00,000.
(c) in respect of a company having a nominal share capital of ` 5,00,000 or more but 300
less than ` 25,00,000.
(d) in respect of a company having a nominal share capital of ` 25,00,000 or more. 500
II. In respect of a company not having a share capital:
7. For registration of a company whose number of members as stated in the articles of 1,000
association, does not exceed 20
8. For registration of a company whose number of members as stated in the articles of 2,500
association, exceeds 20 but does not exceed 100
9. For registration of a company whose number of members as stated in the articles of
association, exceeds 100 but is not stated to be unlimited, the above fee of ` 2,500
with an additional ` 10 for every 50 members, or less number than 50 members, after
the first 100.
10. For registration of a company in which the number of members is stated in the articles 5,000
of association to be unlimited.
11. For registration of any increase in the number of members made after the registration
of the company, the same fees as would have been payable in respect of such
increase, if such increase had been stated in the articles of association at the time
of registration:
Provided that no company shall be liable to pay on the whole a greater fee than
` 5,000 in respect of its number of members, taking into account the fee paid on the
first registration of the company.
12. For registration of any existing company except such companies as are by this Act
exempted from payment of fees in respect of registration under this Act, the same fee
as is charged for registering a new company.
13. For filing or registering any document by this Act required or authorised to be filed or 50
registered with the Registrar.
14. For making a record of or registering any facts by this Act required or authorised to 50
be recorded or registered by the Registrar.
Lesson 1 Company Formation and Conversion 45

ANNEXURE III
SPECIMEN OF CERTIFICATE OF INCORPORATION
FORM I
[See Regulation 16(1)]
Certificate of incorporation
No................................ of 20 .....
I hereby certify that...................... is this day incorporated under the Companies Act, 1956 * (and that the company
is limited).
Given under my hand at................... this................ day of...................... Two thousand and ............................
SEAL ...............................
Registrar of Companies
..................................
State
*To be omitted in respect of unlimited companies.
ANNEXURE IV
SPECIMEN OF THE SPECIAL RESOLUTION FOR ALTERING ARTICLES OF A PRIVATE COMPANY
CONVERTING IT INTO A PUBLIC COMPANY
Resolved That
(i) pursuant to the applicable provisions of the Companies Act, 1956, the company be and is hereby
converted into a public company;
(ii) the name of the company be and is hereby changed from ................. Private Limited to ......................
Limited; and
(iii) the regulations contained in the document submitted for consideration and approval of this meeting,
and initialled by the chairman of the meeting for the purpose of identification, be and are hereby approved
and adopted as the articles of association of the company in substitution for, and to the exclusion of, the
present articles of association of the company.
Explanatory Statement
The Board of directors of the company, at its meeting held on ................., discussed the pros and cons of a
public limited company and a private limited company, and decided to convert the company into a public limited
company and also decided that the present articles of association of the company, which were adopted by the
company when it was incorporated as a private limited company, be also substituted by a new set of articles.
Since the proposed alterations, deletions, insertions etc. to the present articles of association were numerous,the
Board decided that it would be convenient to adopt an altogether new set of articles of association incorporating
all the proposed alterations.
Your directors commend the proposed special resolution for your consideration and adoption of the new set of
articles of association of the company in place of the existing articles of association of the company.
None of the directors is concerned or interested in the proposed resolution.
46 PP-ACL&P

ANNEXURE V
SPECIMEN OF THE SPECIAL RESOLUTION FOR CHANGE OF NAME OF THE COMPANY AS PER
PROVISO TO SECTION 21 OF THE ACT
RESOLVED THAT pursuant to the proviso to Section 21 of the Companies Act, 1956, the name of the
company be and is hereby changed from ............ Private Limited to .......... Limited and the name clause in
the memorandum and articles of association of the company be also accordingly altered.
Explanatory Statement
The Board of directors of the company had, at its meeting held on ......., resolved that the consequent upon
conversion of the company from private limited company to public limited company, the name of the company be
changed from ............ Private Limited to .......... Limited
No director is concerned or interested in the proposed resolution.
ANNEXURE VI
SPECIMEN OF THE SPECIAL RESOLUTION FOR ALTERING THE MEMORANDUM OF ASSOCIATION
(NAME CLAUSE) OF THE COMPANY IN ACCORDANCE WITH SECTION 16 OF THE ACT
RESOLVED THAT pursuant to section 16 of the Companies Act, 1956, Clause I of the Memorandum of
Association of the company be and is hereby altered by substituting the same with the following:
Clause I. The name of the company is ............... Limited.
Explanatory Statement
The Board of directors of the company had, at its meeting held on ......., resolved that the consequent upon
conversion of the company from private limited company to public limited company, Clause I of the memorandum
of association of the company be substituted with The name of the company is.............. Limited.
Hence the proposed special resolution is commended for approval by the members.
No director is concerned or interested in the proposed resolution.
ANNEXURE VII
SPECIMEN OF GENERAL NOTICE OF THE COMPANY ON BECOMING A PUBLIC COMPANY AND
CONSEQUENT CHANGE OF NAME OF THE COMPANY
Name of the Company (new)
Registered Office Address
PUBLIC NOTICE
All concerned are hereby informed that the name of the Company has been changed from ............Private
Limited to ..............Limited with effect from ................... as perFRESH CERTIFICATE OF INCORPORATION
CONSEQUENT UPON CHANGE OF NAME issued by the Registrar of Companies, ................. on the ......... day
of ........., 20.....
The registered office of the company continues to be situated at ..................
Place: ................ for ........ Limited
Date: ................. (...........)
Company Secretary
NOT TO BE PUBLISHED
Lesson 1 Company Formation and Conversion 47

For publication in the ............, ........., ................, and ......... editions of the English daily and .........., Hindi Daily,
........ for ........ Limited
( ...........)
Company Secretary
ANNEXURE VIII
SPECIMEN OF NOTICE FOR THE BOARD MEETING FOR CONVENING GENERAL MEETINGFOR
ALTERATION OF ARTICLES TO CONVERT A PUBLIC COMPANY INTO A PRIVATE COMPANY
Shri ................................. Managing Director
Shri ................................. Whole-time Director
Shri ................................. Director
Shri ................................. Director
Shri ................................. Director
Shri ................................. Director
Dear Sirs,
Notice is hereby given that the next meeting of the Board of directors of the company will be held at ..............
Hrs. on .......... (day), ................ (month) ............ 20....... at the Corporate Office of the company at ........................
to transact the following business:
1. To grant requests from directors for leave of absence, if any.
2. To confirm the minutes of the previous Board Meeting held on .............. and the chairman to sign the
same.
3. Directors to make disclosure of their interest, or changes thereof, if any.
4. To discuss and approve financial results for the quarter ended ..........and to authorise the chairman to
sign the same on behalf of the Board of directors of the company.
5. To authorise the company secretary to arrange for the publication of the approved financial results in the
English daily newspaper ................. and the Hindi daily newspaper ............... in their earliest available
editions and also to send the same to the stock exchanges where the securities of the company are
listed within forty-eight hours of the close of the Board meeting.
6. To fix time, date and venue for holding an extraordinary general meeting of the company to transact the
business as detailed in the agenda including an item for conversion of the company into a private
company the draft whereof would be placed before the meeting as initialled by the chairman as a mark
of identification.
7. To authorise the company secretary or any director to issue notice for the general meeting on behalf of
the Board in accordance with the provisions of Section 171 of the Companies Act, 1956 along with the
Explanatory Statement as required under Section 173(2) of the Act.
8. Any other business with the permission of the chair.
Please make it convenient to attend the meeting.
Thanking you,
Yours faithfully
48 PP-ACL&P

(.........................)
Company Secretary
ANNEXURE IX
SPECIMEN OF SPECIAL RESOLUTION ALTERING ARTICLES OF THE COMPANY SO AS TO INCLUDE
RESTRICTION, LIMITATION AND PROHIBITION, SPECIFIED IN SECTION 3(1)(iii) OF THE ACT,
CONVERTING A PUBLIC COMPANY INTO A PRIVATE COMPANY
RESOLVED THAT
(i) pursuant to proviso to Sub-section (1) of Section 31 of the Companies Act, 1956 and subject to the
approval of the Central Government, the company be and is hereby converted into a private company.
(ii) the articles of association of the company be and are hereby altered by inserting the following new
article as article No.......... after article No. ........... :
Article No.....
The company is a private company and accordingly -
(a) limits the number of its members to fifty not including -
(i) persons who are in the employment of the company; and
(ii) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased; and
(b) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
(c) restricts the right to transfer its shares, provided that where two or more persons hold one or more
shares in thecompany jointly, they shall, for the purposes of this article, treated as a single member;
and
(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or
their relatives.
(iii) the name of the company be and is hereby accordingly changed from ............. Limited to .................
Private Limited.
(iv) the secretary of the company be and is hereby authorised to make an application in e-form No. 1B as
prescribed in the Companies (Central Governments) General Rules and Forms (Amendment) Rules,
1956, along with the prescribed enclosures and the prescribed application fee, to the concerned Registrar
of Companies Explanatory Statement:
The company was originally incorporated as a public company. During the course of its operations, it
was found that the company has to comply with various onerous provisions of the Act as applicable to
public companies. Since the company is a family owned company with very few shareholders, its
requirements of funds is being met by the shareholders, directors or their relatives. As the company
does not intend to borrow any public funds for its operations, there is no point in retaining the public
character of the company. The Board of directors of the company, at its meeting held on ............ resolved
to convert the company into a private company.
Accordingly, it is proposed to pass a special resolutions for conversion of the company into a private
company and effect consequent alterations in the Articles of Association as applicable to a private
company.
Lesson 1 Company Formation and Conversion 49

A copy of the existing memorandum and articles of association of the company is available for inspection
at the registered office of the company during the business hours on any working day.
None of the directors is concerned or interested in the proposed resolution.
ANNEXURE X
SPECIMEN OF BOARD RESOLUTION FOR CALLING A GENERAL MEETING
RESOLVED THAT an extraordinary general meeting of the company be and is hereby called to be held at
............ Hrs. on ............(day) ........... (month) ....................20..... at the registered office of the company at
.............................. for, inter alia, passing the special resolutions for -
(i) conversion of the company into a private company in accordance with Section 31 of the Companies Act,
1956;
(ii) for change of name of the company in accordance with Section 21 of the Companies Act, 1956;
(iii) for alteration of articles of association of the company so as to include, the required restrictions, limitation
and prohibition specified in Section 3(1)(iii) of the Companies Act, 1956, delete all provisions that are
inconsistent therewith in accordance with Section 31 read with Section 3(1)(iii) of the Companies Act,
1956 and include articles which are required for required for a private company ; and
(iv) for alteration of the name clause in the memorandum of association of the company in accordance with
the provision of Section 16 of the Act.
ANNEXURE XI
SPECIMEN OF GENERAL NOTICE ON THE COMPANY BECOMING A PRIVATE COMPANY AND
CONSEQUENT CHANGE OF NAME OF THE COMPANY
Name of the Company (new)..............................................................................
Registered Office Address..................................................................................
PUBLIC NOTICE
All concerned are hereby informed that the name of the Company has been changed from ..................... Limited
to ..............PRIVATE LIMITED with effect from ............... as per FRESH CERTIFICATE OF INCORPORATION
CONSEQUENT UPON CHANGE OF NAME issued by the Registrar of Companies, ................. on the .................
day of ........., 20........
The registered office of the company continues to be situated at ...................
Place: ................. for ........... Limited
Date: ................. (...........)
Company Secretary
NOT TO BE PUBLISHED
For publication in the ............, ........., ................, and ......... editions of the English daily and .........., Hindi Daily,
........ for ........ Limited
(.............................)
Company Secretary
50 PP-ACL&P

ANNEXURE XII
CERTIFICATE OF COMMENCEMENT OF BUSINESS
Emblem of the Central Government
Certificate of Commencement of Business
[Pursuant to Section 149(3) of the Companies Act, 1956]
I hereby certify that........ Limited, which was incorporated under the Companies Act, 1956 on the
...day of......... (month), 200..... and which has filed a duly verified declaration in the prescribed form that
the conditions of Section 149(1)(a) to (d) of the said Act have been complied with, is entitled to commence business.
Given under my hand at.......on this......day of......(month), Two thousand and Thirteen.
Seal of the Sd/-
Registrar of Companies (.....................)
Registrar of Companies,
........................
ANNEXURE XIII
SPECIMEN OF BOARD RESOLUTION PROPOSING COMMENCEMENT OF NEW BUSINESS SPECIFIED
IN OTHER OBJECTS
RESOLVED that, subject to the approval of the Company in general meeting by special resolution in accordance
with section 149(2A) of the Companies Act 1956, the commencing of all or any of the businesses specified in
sub-clause .. of clause ..of the Memorandum of Association of the Company be and are hereby approved.
ANNEXURE XIV
SPECIMEN OF SPECIAL RESOLUTION APPROVING COMMENCEMENT OF NEW BUSINESS BY A
COMPANY
RESOLVED THAT
(i) pursuant to sub-clause (i) of clause (b) of Sub-section (2A) of Section 149 of the Companies Act, 1956,
the company be and is hereby approves the commencement of the business of export of various marine
products including fish and fish products.
(ii)
(iii) Shri................., secretary of the company, be and is hereby authorised to file, pursuant to sub-clause (ii)
of clause (b) Sub-section (2A) of Section 149 of the Companies Act, 1956,......., a duly verified declaration
in e-Form No. 20A prescribed in the Companies (Central Governments) General Rules and Forms
(Amendment) Rules, 2006, within the prescribed period.
Explanatory Statement
Section 149(2A) of the Companies Act, 1956, requires that the members of the company should approve, by a
special resolution, the commencement of any new business specified in the The Other Objects Clause of the
Memorandum.
As the Board is actively thinking of diversifying the activities of the company, the Board of directors feels that the
proposed activity will prove to be useful and beneficial to the company and, therefore, commends the proposed
special resolution for the members approval.
The existing memorandum of association is open for inspection at the companys registered office during usual
business hours on any working day.
None of the directors is concerned or interested in the proposed resolution.
Lesson 1 Company Formation and Conversion 51

ANNEXURE XV
MODEL GENERAL POWER OF ATTORNEY
(On non-judicial Stamp Paper of Requisite Value)
The Registrar of Companies
............................................
............................................
I/We, the undersigned, subscribers to the Memorandum and Articles of Association, ............................................
do hereby authorise Shri............................................ son of............................................ resident
of............................................ to make any alteration, addition, correction, deletion, amendment, and such other
work as may be necessary on our behalf in the Memorandum and Articles of Association and all other documents
filed with you relating to the registration of the above-mentioned company and attest the same on my/our behalf
and to receive/collect the Certificate of Incorporation on our behalf and to do such other things as may be
necessary in connection with the incorporation of the above named company.
Accepted.
Place: Subscriber(s) to the Memorandum and Articles of Association
Date:
ANNEXURE XVi
SPECIMEN OF BOARD RESOLUTION FOR ADOPTION OF PRE-INCORPORATION CONTRACTS
RESOLVED that the preliminary expenses for ` incurred by the promoters of the company for the purpose
of its incorporation as per the statement placed before the meeting be and are hereby approved.
RESOLVED FURTHER that the preliminary contracts entered into by the promoters in connection with the
incorporation of the company as per the statement before the meeting be and are hereby approved.

LESSON ROUND-UP
Before starting a business, one needs to select the form of business entity. For taking this decision,
one must look into advantages of one form of business on another; amount to be invested, objects of
the business etc.
To register a company, one needs to first apply for a Director Identification Number (DIN) which can be
done by filing e-Form for acquiring the DIN. Then one should acquire the Digital Certificate and register
the same on the portal. Thereafter, one needs to get the company name approved by the Ministry of
Corporate Affairs. Once the company name is approved, one can register the company by filing the
incorporation forms depending on the type of company.
For incorporation of a public limited company having share capital, e-forms 1, 18 and 32 are required
to be filed with the Registrar of Companies through MCA portal. Along with e-form 1, Memorandum of
Association, Articles of Association, name approval letter are required to be attached.
The procedure for incorporation of Private limited companies is similar to that of a public limited company
with some exceptions as to minimum paid up capital; number of subscribers; inclusion of provisions of
section 3(1)(iii) in the MOA and AOA of the Company.
Procedure for incorporation of Company limited by Guarantee, for Company regulated by Section 25,
for existing association as limited company without addition to the name the words limited or private
limited, for incorporation of a company as subsidiary of an existing Company, unlimited companies,
nidhi companies, producer companies, foreign company is dealt with in the Chapter in detail.
52 PP-ACL&P

During the continuity of business, it may be found beneficial to convert one form of entity into another
form of business entity. Companies Act provides the scope to convert one form of entity into another
form of entity. The Chapter has dealt with in detail the procedure for conversion of Private company
into public company; Public Company into a Private Company; Sole Proprietor Concern into Limited
Company; Partnership Firm into a Limited Company; Sole proprietor Concern or Partnership firm into
a Limited Company; Inter-state Cooperative Society into a Producer Company.
Public Companies cannot commence business unless they obtain the certificate of commencement of
business in accordance with the provisions under the Act.
Pre-incorporation contracts are not binding upon the company, if these are not adopted or accepted
by the company after its incorporation.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation).
1. State the procedure for incorporation of Producer Company.
2. State the procedure for incorporation of Company for charitable and other public utility purposes without
addition to name the words limited or private limited.
3. Describe the procedure for conversion of a private company into a public company by voluntary action
on the part of the company.
4. Describe the procedure for conversion of Inter State Co-operative Society into a Producer Company.
5. What is the procedure for incorporation of a Nidhi.
6. State the procedure for conversion of a public company into a private company.
7. Describe the procedure for commencement of business.
8. Draft a notice for Board meeting for convening general meeting for alteration of articles to convert
Public company into a Private company.
9. Draft a Board resolution for calling a general meeting.
10. Draft a resolution approving commencement of new business.
11. Draft Board Resolution for adoption of pre-incorporation contracts.
Lesson 2 Procedure for Alteration of Memorandum And Articles 53

Lesson 2
Procedure for Alteration of Memorandum and Articles

LESSON OUTLINE
LEARNING OBJECTIVES
Procedure for change of name of the
company The expression 'alter' means to modify, change
or vary; to make or become different; to change
Procedure for change of objects of the in character, appearance, etc; to change in
company some respect. As per section 2(1A) of the
Companies Act, 1956 alter and alteration
Procedure for change of registered office shall include the making of additions and
of the company omissions. In accordance with this definition of
alteration, an addition or an omission of a
Procedure for liability of directors to be provision or a clause, a word, a phrase or an
made unlimited expression would be regarded, for the purposes
of the provisions of the Act, an alteration, e.g.,
Alteration of Articles of Association of the section 17 (alteration of memorandum) or
Company section 31 (alteration of articles).

Effect of Alteration of Articles The scheme of the present Act prescribes


elaborately the scope of alteration and the
Procedure for changing the financial year procedure for effecting alteration of the
of the company Memorandum and Articles which may be
permissible for a company under the Act. For
LESSON ROUND UP this purpose, approvals of the Registrar of
Companies, Regional Directors, and
SELF TEST QUESTIONS Shareholders have to be obtained. This lesson
aims to apprise the students with the procedural
aspects relating to alteration in the clauses of
Memorandum and Articles of Association of the
Company viz.

53 1ST CORRECTION
54 PP-ACL&P

I. ALTERATION OF CLAUSES OF MEMORANDUM OF ASSOCIATION OF A COMPANY

1. Change of Name of a Company


A company desiring to change its name may do so in accordance with the provisions of Section 21 of the
Companies Act, 1956. The section lays down that a company may, by special resolution and with the approval
of the Central Government signified in writing, change its name. The power of the Central Government to
approve change in the name has been delegated to Registrar of Companies. However, if the only change
required is the addition thereto or deletion therefrom, of the word Private, consequent upon conversion of a
public company into a private company or vice versa, no such approval of Central Government is required.
In the light of the above provisions of Section 21 of the Act, the company has to take the following procedural
steps:
1. Issue notice in writing to every director of the company for the time being in India and at his usual
address in India to every other director as per the provisions of Section 286 of the Act. The notice must
contain time, date and venue for the board meeting and detailed agenda of the business to be transacted
thereat.
2. Hold the Board meeting to
(i) consider and approve the proposed name by passing a resolution. Considering that the proposed
name may not be made available by the concerned Registrar of Companies (ROC), the Board must
consider and decide at least five more names in order of their preference. These names are required
to be given in the application for availability of name to be made to the Registrar of Companies in e-
form 1A, as prescribed in the Companies (Central Governments) General Rules and Forms
(Amendment) Rules, 2006, for his consideration. If the proposed name is not available, the five
additional names may be considered by the Registrar and whichever of those names is available,
the same be reserved for the company. A formal Board resolution is required to be passed at the
meeting.
(ii) authorise the Company Secretary/Director to make the required application to the Registrar of
Companies in e-form 1A for seeking availability of the proposed name and pay the prescribed
application fee of `1000/-. [For specimen, please see Annexure I(a)]
3. The application in e-Form 1A, to the Registrar of Companies accompanied by a fee of rupees one
thousand paid electronically should have the following documents as attachment:
1. A copy of Board resolution;
2. Trademark or authorization to use trade mark, if the name of the company is based on trade mark
or application for deed of assignment;
3. If change is due to a direction received from the Central Government, then a copy of such direction;
If the application is verified by the practising professional, the name is made available by the system
online without back end processing by the Registrar of Companies. In other case, the Registrar is
required to inform the applicant, about the availability or otherwise of the name applied for, within three
days of the receipt of the application vide rule 4A(1).
If the proposed name is available, the same should be adopted, that is to say, the adoption of such
name should be effected, within sixty days from the date of intimation by the Registrar vide rule
4A(2)(a). The name allowed shall lapse after expiry of sixty days, from the date it is allowed.
Lesson 2 Procedure for Alteration of Memorandum And Articles 55

On filing e-form 1A, the system will process and generate a Service Request Number (SRN) which shall
be used for tracking the status of name clearance.

4. On receipt of approval of name, the Company Secretary/Director must, in consultation with the Chairman
of the Board, fix time, date and venue for holding another Board meeting for transacting the following
business:

(i) To take note of the approval received from the ROC.

(ii) To fix time, date and venue for holding a general meeting (annual or extraordinary) of the shareholders
of the company

(a) for passing a special resolution required under Section 21 of the Act for changing the name of
the company; and

(For specimen of special resolution for change of name of the company, please see Annexure
I(b) at the end of this study).

(b) for passing another special resolution under Section 16 of the Act for altering clause I (name
clause) in the memorandum of association of the company in accordance with Section 16 of the
Act.

[For specimen of special resolution for altering the memorandum (name clause) of the company,
please see Annexure II at the end of this study].

(iii) To approve notice of the general meeting and the explanatory statement to be annexed to the notice
under Section 173 (2) of the Act for the general meeting and to authorise the Company Secretary/
Director to issue the notice on behalf of the Board.

5. Issue notice of the general meeting to all the members of the company, its directors and the auditors.

6. In the case of listed companies, send three copies of the notice to each stock exchange where the
securities of the company are listed (Refer Clause 31 of the Listing Agreement).

7. A general notice of the proposed general meeting may also be published in newspapers.

8. Hold the general meeting and pass the resolutions as contained in the notice.

9. Send to each stock exchange, six copies of the alterations of the memorandum (one of them must be
certified) soon after the conclusion of the general meeting, in case shares of the company are listed
(Refer Listing Agreement).

10. Send to each stock exchange, a copy of the proceedings of the general meeting in case shares of the
company are listed (Refer clause 31 of the Listing Agreement).

11. File with the ROC e-form 23 with a certified true copy of each special resolution passed at the general
meeting along with the explanatory statement under Section 173 and altered copy of Memorandum of
Association and Articles of Association and prescribed filing fee.

12. Make an application in e-form 1B to the concerned Registrar of Companies alongwith the prescribed
application fee, for obtaining Central Governments approval to the change of name of the company.
The attachments with e-form 1B are as below:

(i) Minutes of the members' meeting;

(ii) Certified copy of the order for condonation of delay (where applicable);

(iii) Optional attachment(s) - if any.


56 PP-ACL&P

Note: Following particulars will be filled up in the form itself:


(a) Reasons for change of name (Column 5 of the Form).
(b) Particulars of filing e-form 23 (Column 6 of the Form).
(c) Name of the Company at the time of Incorporation (Column 7 of the Form).
(d) Number of members present, numbers who voted in favour and numbers who voted against (Column
8 of the Form).
(For specimen of the e-form 1B for obtaining Central Governments approval to the change of name of
the company, please refer the CD provided along with the Study Material or see the link http://
www.mca.gov.in/MCA21/Download_eForm_choose.html ).
13. After scrutiny of the documents filed, the ROC shall issue a fresh certificate of incorporation digitally
signed.
14. Issue, if necessary, a general notice in newspapers informing all concerned, about the change of name
of the company.
15. Intimate all concerned persons/authorities about the changed name of the Company, particularly the
Stock Exchanges, National Securities Depository Ltd., Central Depository Services (India) Ltd., Income
Tax Authorities, Central Excise Authorities, Sales-tax Authorities in various States, Customs Authorities,
Chief Inspector of Factories, Regional Provident Fund Commissioner, suppliers of raw materials,
customers, banks etc.
16. Arrange for a new Common Seal and have the same adopted at a meeting of the Board of directors and
keep both the old and the new Common Seals under lock and key.
17. Get stationery printed with the new name and/or affix rubber stamp of the new name on all the existing
stationery including the blank share certificates.
18. Get the new name of the Company painted on all the signboards or name boards wherever they are
displayed.
19. Correct all records, registers including the Register of Members, Charges registered with ROC, share
certificates, debenture certificates, bonds and other securities, every copy of Memorandum and Articles
of Association, other books and documents pertaining to the companys business and affairs.

EFFECT OF CHANGE OF NAME OF A COMPANY


1. Generally: Sub-section (3) of section 23 of the Act provides for the effect of a change of name of a company.
According to this section, the change of name:
Shall not affect any rights or obligations of the company;
Shall not render defective any legal proceedings by or against the company; and
Shall not affect any legal proceedings continued or commenced by or against the company pending in
its old name; they may continue in its new name.
Sub-section (3) recognizes the continued existence of a company which has changed its name. The effect of the
issue of the certificate of incorporation on change of name is not to reform or re-incorporate the company as a
new entity. When the section refers to the company changing its name, it recognizes the continued existence of
the company notwithstanding the change.
A change of name of a company does not result in its dissolution and incorporation of a new company under a
new name. Section 21 permits a company to change its name in the manner as prescribed. Sub-section (3)
Lesson 2 Procedure for Alteration of Memorandum And Articles 57

expressly provides that the change of name will not affect any rights or obligations of the company and that legal
proceeding in the old name will not be rendered defective but will be continued by or against the company in its
new name. The expression used in the section is "the company" and not "old company", or "new company", or
"dissolved company". There are further indications that despite change of name, the entity continues.
Section 21 enables a company to change its name by a given method, viz., by a special resolution and with the
approval of the Central Government signified in writing. It does not provide for altering the entity but only the
name. This is also made quite clear by the provisions of section 23. Sub-section (1) of section 23 states that
where a company changes its name in pursuance of section 21 or section 22, the Registrar shall enter the new
name on the register in the place of the former name, and shall issue a fresh certificate of incorporation with the
necessary alterations embodied therein and the change of name shall be complete and effective only on the
issue of such a certificate. It would be observed that the emphasis is on the expression 'change of name'.
(Kalipada Sinha v. Mahalaxmi Bank Ltd. AIR 1966 Cal 585)
2. Right to sue: A change of name under section 21 does not affect the rights and obligations of the company or
render defective any legal proceedings by or against it, and any legal proceedings, which might have been
continued or commenced by or against the company by its former name, may be continued by or against the
company by its new name.
When a company is converted into a public company, apart from the change in its name, the constitution and the
entity of the company is not affected in any other manner and the legal proceedings instituted by its former name
can be continued by its new name.(Solvex Oils & Fertilizers v. Bhandari Cross-Fields (P) Ltd. (1978) 48 Com
Cases 260 (P&H))
The change of name does not affect the entity of the company or its continuity as the same entity. It remains for
all practical purposes the same entity with same rights, privileges and liabilities as before. In case of change of
name during the pendency of legal proceedings by or against the company, the question which arises before the
court is whether the proceedings are initiated by an entity which is not in existence or by an entity in existence
but only misdescribed in the plaint.[Pioneer Protective Glass Fibre P. Ltd. v. Fibre Glass Pilkington Ltd. (1986) 60
Com Cases 707 (Cal) (DB): (1985) 3 Comp LJ 309 (Cal)] If a company ceases to be in existence, the plaint is
liable to be rejected [Shree Choudhary Cold Storage (1972) v. Ruby General Insurance Co. Ltd. AIR 1982 Cal
124], but if the company continued to exist, the cause title of the plaint suffers from misdescription, which could
be corrected by amendment of the plaint [Patel Roadways (P) Ltd. v. Bata Shoe Co. (P) Ltd. 1979 (2) Cal HCN
279]
The first part of the sub-section (3) protects the rights and obligations of the company, already acquired before
the change of its name and also protects legal proceedings by or against it. The second part of the sub-section
(3) authorises the continuation of a pending legal proceeding, which was commenced by the company in its
former name. The second part provides that legal proceedings commenced by or against the company in its
former name, may be continued by the company after the change of its name. Nothing in this sub-section
authorises the company to commence a legal proceeding in its former name at a time when it had acquired its
new name, which has been put on the register of companies. Therefore, after the change of name, the company
is not authorised to sue in its old name [Malhati Tea Syndicate Ltd. v. Revenue Officer, Jalpaiguri (1973) 43 Com
Cases 337 (Cal): AIR 1973 Cal 78].
The change of name does not bring into existence a new company. The company remains the same entity as
before, only the name changes. A new certificate of incorporation has to be issued but that does not incorporate
a new company.
3. Tax liability: There is no substitution or succession of one legal person by another legal person in the instant
case. It is only a change in name. Even in the absence of any special provision in the Income-Tax Act, the
change does not affect the liability of the company to pay income tax arrears.[Economic Investment Corporation
Ltd. v. CIT (1970) 40 Com Cases (Cal) (DB)]
58 PP-ACL&P

Assessment of tax against a private limited company is no valid explanation to contend after becoming public
limited company, that the assessment is not valid. [Rajamoni Amma (N.) v. DCIT (1991) 2 Comp LJ 77 (Ker):
(1991) 72 Com Cases 728]
4. Execution of decree: The object of the section is to provide that notwithstanding the change in the name, there
is no alteration in the constitution or the legal status of the company. Even after the name of a company is altered
by special resolution and sanction by the Registrar is accorded under this section the company continues to
possess the same rights and is subject to the same obligations as before the change. Therefore, if a company
has the power to execute a decree in its old name it has a right after the change to execute the decree in its new
name. The fact that alteration in the name was not brought to the notice of the court would not in any manner
render defective or irregular proceedings initiated by a company in its former name. A decree obtained by a
company in its former name can be executed by it in the new name after it has obtained a certificate for the
altered name. The change of the name does not affect the rights of the company. It is not necessary that the new
name should have been entered in the decree. [Abdul Qayum (F S) v. Manindra Land & Building Corporation
Ltd. (1955) 25 Com Cases 143 (All): AIR 1955 All 192]
5. Shareholding by company: The company which has changed its name would be entitled to ask those companies
in which it is holding shares, to substitute its old certificates by new ones. [Sulphur Dyes Ltd. v. Hickson &
Dadajee Ltd. (1995) 83 Com Cases 533 (Bom)]

Change of name by rectification


According to section 22 of the Act, if a company is registered through inadvertence or otherwise by a name
which is identical with or too nearly resembles, the name by which a company in existence has been previously
registered, the company itself may change the name by ordinary resolution and with the previous approval of
the Central Government (power delegated to Regional Director). In such a case, the company should pass an
ordinary resolution within three months from the date of the direction or such longer period as the Central
Government may think fit to allow. The Central Government can give a direction for rectification of a name within
twelve months from the date of incorporation of a company. An application to the Registrar made after the time
limit of twelve months is invalid and the court has no power to extend the period since that would be violative of
statutory provisions.(Sidhvi Constructions (India) Pvt. Ltd. v. Registrar of Companies (1997) 90 Comp Cas 2999
(AP): (1997) 24 CLA 207(AP)
The procedure to be followed in this case is as under:
(i) Board of directors to pass resolutions for:
(a) to approve change of name;
(b) to make application in e-Form 24A electronically to the Regional Director seeking his opinion that the
name of the company is identical with, or too nearly resembles the name by which a company in existence
has been previously registered, and hence needs to be rectified;
(c) to convene an extraordinary general meeting and to authorize the Company Secretary or any Director
to issue notice;
(d) to provide necessary authorizations to the Company Secretary/any Director to sign various forms/
documents for this purpose.
(ii) Apply to Regional Director for seeking his opinion as mentioned above.
(iii) Convene general meeting and pass ordinary resolution for change of name by rectification.
(iv) Make application to Regional Director in e-Form 24A electronically for his approval for the change of name.
(v) Obtain fresh certificate of incorporation from the Registrar. (Section 23)
Lesson 2 Procedure for Alteration of Memorandum And Articles 59

(v) After approval is received, the change will be carried out wherever the name appears.
(vi) It may be desirable (though not essential) to announce the change in the newspapers and inform it to the
creditors, suppliers, shareholders and all statutory authorities.

2. CHANGE OF OBJECTS OF A COMPANY


A company may change its objects as enshrined in its memorandum of association in accordance with the
provisions of Sections 17, 18 and 19 and other applicable provisions, if any, of the Companies Act, 1956.
Section 17 of the Act lays down that a company may, by special resolution, alter the provisions of its memorandum
with respect to its objects so far as may be required to enable it
(a) to carry on its business more economically or more efficiently; or
(b) to attain its main purpose by new or improved means; or
(c) to enlarge or change the local area of its operations; or
(d) to carry on some business which under existing circumstances may conveniently or advantageously be
combined with the business of the company; or
(e) to restrict or abandon any of the objects specified in the memorandum; or
(f) to sell or dispose of the whole or any part of the undertaking or of any of the undertakings, of the
company; or
(g) to amalgamate with any other company or body of persons.
Section 18 (1) of the Act requires such a company to file with the Registrar a copy of the special resolution
passed by the company in relation to clauses (a) to (g) of Sub-section (1) of Section 17, within one month from
the date of such resolution together with a printed copy of the memorandum as altered and the Registrar shall
register the same and certify the registration under his hand within one month from the date of filing of such
documents.
Sub-section (2) of Section 18 states that the certificate shall be conclusive evidence that all the requirements of
the Act with respect to the alteration have been complied with and henceforth the memorandum so altered shall
be the memorandum of the company.
Section 19 of the Act lays down that no such alteration made under Section 17 of the Act shall have any effect
until it has been duly registered in accordance with the provisions of Section 18.
Sub-section (2) of Section 19 states that if the documents required to be filed with the ROC under Section 18 are
not filed within the time allowed under that section such alteration made under Section 17 and all proceedings
connected therewith, shall, on the expiry of such period, become void and inoperative.

Alteration of Memorandum of Producer Company


Section 581H states that a producer company may alter its objects specified in its Memorandum of Association
by passing a special resolution. Such alteration must not be inconsistent with Section 581B. This authority is
available to the producer company notwithstanding the provisions contained in Section 17 of the Act.
A copy of the amended memorandum, together with a copy of the special resolution duly certified by two directors,
shall be filed with the Registrar within 30 days from the date of adoption of special resolution.
In case of transfer of registered office of a Producer Company from the jurisdiction of one Registrar to another,
certified copies of special resolution certified by two directors shall be filed with both the Registrars within thirty
days and each Registrar shall record the same and thereupon the Registrar from whose jurisdiction the office is
transferred, shall forthwith forward to other Registrar all documents relating to Producer Company. The alteration
60 PP-ACL&P

of provisions of memorandum of Producer Company relating to the change of place of its registered office from
one state to another shall not take effect unless it is confirmed by CLB* on petition.

Procedure for changing objects of a company


In the light of the above provisions of Sections 17, 18 and 19 of the Act, a company, desirous of altering the
objects clause in its memorandum of association, is required to adopt the following procedure:
1. Issue notice for a Board meeting in writing to every director of the company for the time being in India
and at his usual address in India to every other director [Refer Section 286 of the Act]. The notice must
contain time, date and venue for the meeting and detailed agenda of the business to be transacted
thereat.
2. Hold the Board meeting at the appointed time, date and venue to
(i) consider and to pass a resolution approving the proposed amendments to the objects clause of the
memorandum of association of the company.
(ii) consider and to pass another resolution fixing time, date and venue for holding general meeting of
the company for passing a special resolution under Section 17 of the Act for change of objects
clause of the memorandum of association of the company.
(iii) approve notice for the general meeting and the explanatory statement to be annexed to the notice
under Section 173 (2) of the Act for the general meeting and to authorise the company secretary or
some other competent officer to issue the notice on behalf of the Board.
3. Issue notice of the general meeting to all the members of the company, its directors and the auditors.
4. Send three copies of the notice to each stock exchange where the securities of the company are listed
[Refer clause 31(c) of the Listing Agreement]. A general notice of the general meeting may also be
published in newspapers.
5. Hold the general meeting and pass the proposed special resolution. If the company is a listed company,
then ensure that the Special Resolution as aforesaid is passed only through postal ballot. (Please refer
Companies (Passing of Resolutions by postal Ballot) Rules, 2011).
6. Send to each stock exchange, six copies of the alterations of the memorandum of association (one of
them must be certified) as soon as they are adopted by the company in general meeting in case of a
listed company (Refer clause 33 of the Listing Agreement).
7. Send to each stock exchanges, a copy of the proceedings of the general meeting in case of a listed
company (Refer clause 31 of the Listing Agreement).
8. File with the Registrar of Companies, e-form 23 along with a copy of the special resolution passed by
the company with a copy of the explanatory statement annexed to the notice of the meeting and the
amended copy of memorandum of association attached to the e-form, within one month of passing of
the resolution.
9. Obtain from the Registrar of Companies, certificate of registration of the alteration of the memorandum.
Under MCA-21, the user may select Get Certified Copy and follow the procedure.
10. Amend each copy of the memorandum of association of the company available in the office or in the
alternative fresh copies of memorandum of association be got printed.

* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come
into effect.
Lesson 2 Procedure for Alteration of Memorandum And Articles 61

(The specimen resolutions for changing the objects clause of a company are given at Annexures III(a)
and III(b) at the end of this Study).

3. CHANGE OF REGISTERED OFFICE OF A COMPANY


Section 146(1) of the Companies Act, 1956 lays down that every company shall have a registered office from the
day it begins to carry on business or from the thirtieth day after the date of its incorporation, whichever is earlier,
to which all communications and notices may be addressed.
Sub-section (2) of the section makes it obligatory on the part of every company to send to the concerned
Registrar of Companies, notice of the situation of its registered office, and of every change therein, in the
prescribed e-Form No. 18, within thirty days after the date of its incorporation or after the date of the change, as
the case may be. It has to be stated in e-form 18 whether Registered Office is Owned by company; or Owned
by Director (not taken on lease by company) or Taken on Lease by Company or Owned by any other entity/
Person (Not taken on lease by company).
The proviso to the Sub-section (2) lays down that except on the authority of a special resolution passed by the
company, the registered office of the company shall not be removed outside the local limits of any city, town or
village where such office is situated.
The Companies Act, 1956 contains a number of Sections relating to the registered office of a company. Some of
the important provisions in this respect are:
(i) Section 143 of the Act lays down that every company shall keep at its registered office a Register of
Charges and enter therein all the charges specifically affecting property of the company, and all floating
charges on the undertaking or on any property of the company giving, in each case, short description of
the property charged, amount of the charge and the names of the persons entitled to the charge.
(ii) Section 163 of the Act requires a company to keep its register of members, index of members, register
and index of debentureholders and copies of all annual returns under Sections 159 and 160 together
with enclosures, at its registered office.
(iii) Section 303 of the Act requires a company to keep at its registered office, a register of its directors,
managing director, manager and secretary containing with respect to each of them, the prescribed
particulars.
(iv) Section 209 lays down that every company shall keep at its registered office proper books of accounts.
The Companies Act permits a company to change its registered office from its existing situation to another
situation, (i) within the local limits of the same city, town or village or (ii) outside the local limits of the same
city, town or village (a) under the jurisdiction of the same Registrar of Companies or (b) under the jurisdiction of
another Registrar of Companies within the same State or (iii) to another State. The procedures for each of the
above cases are given hereunder:
(i) Procedure for change of situation of registered office within the local limits of the city, town or
village where it is presently situated.
A company desirous of changing the situation of its registered office within the local limits of the city,
town or village where it is presently situated has to follow the following procedure:
1. Hold a meeting of its Board of directors of the company to take a decision by passing a resolution for
shifting the registered office of the company to another place within local limits of city, town or
village, where it is presently situated.
(For specimen of Board resolution for shifting the registered office of the company to another place
within local limits, please see Annexure IV at the end of this Study.)
62 PP-ACL&P

2. Within thirty days of the passing of the Board resolution, the company must file with the concerned
Registrar of Companies, e-form 18 prescribed in the Companies (Central Governments) General
Rules and Forms (Amendment) Rules, 2006 and in compliance with the provision of Sub-section
(2) of Section 146 of the Companies Act and also pay with the Form, filing fee as prescribed in
Schedule X to the Companies Act alongwith a copy of the Board resolution. This e-form is to be pre
certified by any one of these professionals - company secretary or chartered accountant or cost
accountant (in whole-time practice). Further the company secretary or chartered accountant or cost
accountant (in whole-time practice) has to personally visit the new registered office address or
premises of the company and has to verify that the company actually exists at this address. In this
context, he also has to certify that he has personally visited the new registered office address and is
of the opinion that the premises are indeed at the disposal of the applicant company. Following
documents have to be attached to e-Form 18:
(a) Proof of Registered Office address which is mandatory attachment
(b) No-objection certificate from director if registered office is owned by director (not taken on lease
by company)
(c) A proof that the company is permitted to use the address as the registered office of the company
if the same is owned by any other entity/Person (not taken on lease by company).
3. Issue, if necessary, a general notice by way of an advertisement in newspaper(s) informing all
members and other concerned persons, about the change of situation of the registered office of the
company so that they may address all future communications to the company at its new address.
4. Address of the new registered office of the company must also be incorporated on all items of
stationery, sign boards and at all other places wherever it occurs.
5. The stock exchanges, where the securities of the company are listed, should also be promptly
informed about the change of the registered office of the company.
(ii) (a) Procedure for shifting of registered office outside the local limits of the city, town or village
where it is presently situated within the same State under the jurisdiction of the same Registrar
of Companies.
According to the proviso to Sub-section (2) of Section 146 of the Companies Act, 1956, a company cannot,
except on the authority of a special resolution passed in general meeting, remove its registered office outside
the local limits of the city, town or village where it is presently situated.
Accordingly, a company desirous of shifting its registered office outside the local limits of the city, town or village
where it is presently situated, is required to take the following procedural steps:
1. Hold a Board meeting
(i) to pass a resolution, for shifting the registered office of the company to another place outside the
local limits of city, town or village, where it is presently situated;
(ii) to pass a resolution fixing time, date and venue for holding general meeting of the company for
passing a special resolution pursuant to the proviso to Sub-section (2) of Section 146 of the
Companies Act, 1956;
(iii) to pass a resolution approving notice of the general meeting along with the explanatory statement
which is required to be annexed to the notice of the meeting as per requirement of Section 173(2) of
the Companies Act; and
(For specimen of the Board resolution approving notice of the general meeting, please see Annexure
V at the end of this Study).
Lesson 2 Procedure for Alteration of Memorandum And Articles 63

(iv) to pass a resolution authorising the Company Secretary/Director to issue the notice of the general
meeting on behalf of the Board of directors of the company.
(For specimen of the Board resolution authorising the company secretary to issue notice of the general
meeting, please see Annexure VI at the end of this Study).
2. Issue notice along with the explanatory statement of the general meeting to each member, each director
and the auditors of the company.
3. Send three copies of the notice to each stock exchange where the securities of the company are listed
[Refer clause 31(c) of the Listing Agreement].
4. If necessary, public notice of the general meeting may also be published in news papers.
5. Hold the general meeting and pass the special resolution as per notice of the general meeting.
(For specimen of the special resolution shifting the registered office of the company to another place
outside the local limits but within the same State, please see Annexure VII at the end of this Study).
If the company is a listed company, then ensure that the Special Resolution as aforesaid is passed only
through postal ballot. (Please refer Companies (Passing of Resolutions by Postal Ballot) Rules, 2011).
6. Send to each stock exchange, a copy of the proceedings of the general meeting in case of a listed
company (Refer clause 31 of the Listing Agreement).
7. File with ROC within thirty days of passing of the special resolution-
(a) e-form 23 along with a certified true copy of the special resolution passed at the general meeting
and the explanatory statement annexed to the notice of the general meeting alongwith the prescribed
filing fee.
(b) e-form 18, containing notice of change of registered office, along with the filing fee and copy of the
special resolution.
E-form 18 is to be pre-certified by any one of these professionals - company secretary or chartered
accountant or cost accountant (in whole-time practice). Further the company secretary or chartered
accountant or cost accountant (in whole-time practice) has to personally visit the new registered office
address or premises of the company and has to verify that the company actually exists at this address.
In this context, he also has to certify that he has personally visited the new registered office address and
is of the opinion that the premises are indeed at the disposal of the applicant company. Following
documents have to be attached to e-Form 18:
(a) Proof of Registered Office address which is mandatory attachment
(b) No-objection certificate from director if registered office is owned by director (not taken on lease by
company).
(c) A proof that the company is permitted to use the address as the registered office of the company if
the same is owned by any other entity/Person (not taken on lease by company).
8. Issue a public notice by an advertisement in newspaper(s) informing all the members of the company,
other concerned persons about the change of registered office of the company so that they may address
all future communications to the company at its new address.
9. Change address of the registered office of the company on all items of stationery, sign boards and at all
other places wherever it occurs.
10. Inform the stock exchanges, where the securities of the company are listed, about the change of registered
office of the company.
64 PP-ACL&P

11. Get the new address of the registered office of the company painted on all the sign boards wherever
they are displayed.
12. Write new address of the registered office of the company on all records, registers including the register
of members, share certificates, sign boards, name plates etc.
(ii)(b) Procedure for shifting of registered office outside the local limits of the city, town or village where
it is presently situated to the jurisdiction of another Registrar of Companies but within the same State.
According to Section 17A inserted by the Companies (Amendment) Act, 2000, a company cannot change the
place of its registered office from one place to another from the jurisdiction of one Registrar to another within the
same State wherein more than one Registrar of Companies have jurisdiction, unless such change is confirmed
by the concerned Regional Director.
Hence, a company, which needs to change its registered office within the same State but under the jurisdiction
of another Registrar of Companies, shall have to take the following procedural steps in addition to the steps 1 to
12, specified in the immediately preceding para i.e. (ii) (a) here of
1. After holding general meeting (annual or extra ordinary) and having passed special resolution to this
effect the company should make application to the Regional Director in the prescribed e-Form 1AD
(Specimen of e-form 1AD is given in the CD provided along with the Study Material or at the link http:/
/www.mca.gov.in/MCA21/Download_eForm_choose.html) for confirmation along with a fee of ` 500/-.
(For specimen resolution please see Annexure VIII at the end of this Study).
The attachments prescribed alongwith e-form 1AD are:
(a) Copy of the minutes of the meeting
(b) Copy of the newspaper advertisement
(c) Particulars of investor grievances, if any
(d) Any attachment to support the details of the prosecution filed against the company and its officers in
default, if any.
2. The Regional Director shall pass an order in writing confirming the change after giving necessary
opportunity of being heard to the parties, within four weeks from the date of receipt of application.
3. The company shall file with the concerned Registrar of Companies, a certified copy of the confirmation
order of the Regional Director within two months from the date of confirmation order alongwith e-form
21 (Specimen of e-form 21 is given in the CD provided along with the Study Material or at the link http:/
/www.mca.gov.in/MCA21/Download_eForm_choose.html ).
4. The company should obtain a certificate of registration of the confirmation order from the Registrar of
Companies who shall certify under his hand within one month from the date of filing of such confirmation
order.
5. Such certificate shall be conclusive evidence that all the requirements of this Act for the alteration and
confirmation have been complied with and henceforth the memorandum of association so altered shall
be the memorandum of association of the company.
6. The Registrar shall make necessary changes in the register and transfer the records to the Registrar of
Companies under whose jurisdiction the company has shifted its registered office.
(iii) Procedure for changing the situation of registered office outside the State in which it is presently situated.
Sections 17, 18 and 19 of the Companies Act, 1956 lay down the procedure for changing the place of registered
office of a company from one State to another.
Lesson 2 Procedure for Alteration of Memorandum And Articles 65

Section 17 lays down that a company may, by special resolution, alter the provisions of its memorandum so as
to change the place of its registered office from one State to another. Sub-section (2) of said Section further
provides that the alteration of the provisions of memorandum relating to the change of the place of its registered
office from one State to another shall take effect only when it is confirmed by the Central Government (Regional
Director) on petition.
Ministry of Corporate Affairs (MCA), vide Notification G.S.R. (E) dated July 10, 2012 has notified August 12,
2012 as the effective date of Companies (Second Amendment) Act, 2002, w.r.t. certain sections of Companies
Act, 1956.
MCA vide notification dated July 10, 2012 has notified the new form and procedure under which the above
petition is to be made by amending the Companies (Central Governments) General Rules and Forms, 1956 by
Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2012 with effect from 12th
August, 2012. New rules 4BBB, 6E, 6F are inserted prescribing new forms and procedures for filing petition
under section 17. Now petition under section 17 has to be made online to the Regional Director in E-form no.
24AAA. Format of petition, Memorandum of Appearance and list of documents to be attached with the petition is
given in the said notification. Now the petition has to be filed in Form No. 1 as specified in Annexure E of
Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2012 along with Form No.
24AAA to the Regional Director.
According to Section 18(1) of the Act, such a company has to file with the Registrar of Companies of both the
States, a certified copy of the order of the Central Government (Regional Director) made under Sub-section (5) of
Section 17 confirming the alteration within three months from the date of the order, a printed copy of the memorandum
as altered and e-form 21 (duly filled in and signed) as prescribed in the Companies (Central Governments) General
Rules and Forms (Amendment) Rules, 2006. The Registrar shall register the same and certify the registration
under his hand within one month from the date of filing of such documents. Besides, the transfer of the Companys
records from the office of one Registrar to the other Registrar of Companies is also an important function and it
should be attended on priority basis. (For specimen of e-form 21, please refer the CD provided along with the
Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html ).
The certificate issued by the ROC shall be conclusive evidence that all the requirements of the Act with respect
to the alteration have been complied with and henceforth the memorandum so altered shall be the memorandum
of the company [Refer Sub-section (2) of Section 18].

Extension of time by Regional Director for filing documents with Registrar


According to Sub-section (4) of Section 18 of the Act, the Central Government (Regional Director) may, at any
time, by order, extend the time for filing the documents for registration of the alteration under Section 18 by such
period as it thinks proper.
In re. Webfit Ltd. (1990) 4 CLA 264 (CLB) the Registrar had declined to register the alteration on the ground that
CLBs order had not been filed before him within the time allowed under Section 18. The CLB, which was moved
for condonation of delay, directed the Registrar to register the order.
However, if once the resolution altering the memorandum of association of a company so as to change the place
of its registered office from one State to another becomes void by operation of law, even the CLB cannot grant
extension of time - Ganga Textiles Ltd. v. ROC (1998) 29 CLA 467 (CLB).
In another case, where certified copy of the order of the CLB confirming special resolution passed by the
company was not filed for registration with the Registrar, it was held that the CLB was not competent to revive its
order and validate alteration which had become void and inoperative by reason of more than four months delay
Shivalik Steels & Alloys Pvt. Ltd. v. ROC (1991) 6 CLA 147 (CLB).
Sub-section (3) of Section 18 further provides that where the alteration involves a transfer of the registered
66 PP-ACL&P

office from one State to another, a certified copy of the order confirming the alteration shall be filed by the
company with the Registrar of each of the States, and the Registrar of each such State shall register the same,
and shall certify under his hand the registration thereof; and the Registrar of the State from which such office is
transferred shall send to the Registrar of the other State all documents relating to the company registered,
recorded or filed in its office.
Section 19(1) of the Act lays down that no such alteration made under Section 17 of the Act shall have any effect
until it has been duly registered in accordance with the provisions of Section 18 of the Act.
Sub-section (2) of Section 19 further states that if the documents required to be filed with the ROC under Section
18 are not filed within the time allowed under that section, such alteration and the order of the Regional Director
made under Sub-section (5) of Section 17 and all proceedings connected therewith, shall, at the expiry of such
period, become void and inoperative.
In accordance with the abovementioned provisions of Sections 17, 18 and 19 of the Companies Act read with
rule 4BBB, 6E and 6F of Companies General Rules and Forms (Amendment Rules) 2012,, a company proposing
to shift its registered office from the State where it is presently situated to another State, has to follow the
following procedure:
1. Hold a Board meeting
(i) to decide about the proposal to shift the registered office of the company to another State.
(ii) to fix time, date and venue for holding general meeting of the company for passing a special resolution
for altering the memorandum of association of the company so as to change the situation of its
registered office of the company to another State, subject to confirmation by the Regional Director
pursuant to the provisions of Sub-section (2) of Section 17 of the Companies Act, 1956 and also for
authorising the company secretary to make a petition under Sub-section (2) of Section 17 of the Act
to the Regional Director seeking confirmation of the alteration of the memorandum of association of
the company.
(For specimen of the Board resolution for altering the memorandum of association of the company
so as to change the situation of its registered office to another State, please see Annexure IX at the
end of this Study).
(iii) to approve notice of the general meeting alongwith the explanatory statement which is to be annexed
to the notice of the meeting as per requirement of Section 173 (2) of the Companies Act; and
(iv) to authorise the Company Secretary/Director to issue notice of the general meeting on behalf of the
Board of directors of the company.
2. Issue notice (along with the explanatory statement) of the general meeting to all members, directors
and the auditors of the company.
3. Send three copies of the notice to each stock exchange where the securities of the company are listed
[Refer clause 31(c) of the Listing Agreement].
4. A general notice of the general meeting may also be published in newspapers.
5. Hold the general meeting and pass the special resolution for altering the memorandum of association of
the company so as to change the situation of its registered office to another State, as per notice of the
general meeting. [For Specimen of Special Resolution, please see Annexure X].
6. Send to each stock exchange, immediately after the conclusion of the general meeting, proceedings of
the general meeting as required by the Listing Agreement.
7. Also send to each stock exchange, immediately after the conclusion of the general meeting, six copies
Lesson 2 Procedure for Alteration of Memorandum And Articles 67

(one of them certified) of the amendments to the memorandum of association of the company as per the
Listing Agreement. (Refer Clause 33 of the Listing Agreement)
8. File with the ROC within thirty days of passing of the resolution, e-form 23 along with a certified true
copy of the special resolution passed at the general meeting alongwith the explanatory statement annexed
to the notice of the general meeting and the prescribed filing fee.
9. Not less than one month before filing of the petition under Section 17(2) of the Companies Act with the
Regional Director for confirmation of the alteration to the memorandum, the company is required to
(i) Publish a general notice, at least once, in a daily newspaper published in English and in the principal
language of the State in which the registered office of the company is situated, clearly indicating the
substance of the petition and stating that any person whose interest is likely to be affected by the
proposed alteration of the Memorandum of Association and may intimate to the Regional Director
within twenty-one days of the date of publication of that notice, the nature of interest and grounds of
opposition; and;
(ii) Serve, by certification of posting, individual notice to the effect set out in clause (i) above on each
debenture-holder and creditor of the company.
10. After the expiry of thirty days of the general notice as aforementioned, as authorised by the company in
general meeting, the company secretary shall make the required petition to the Regional Director in
Form 1 as referred in Annexure E of Companies General Rules and Forms along with Form 24AAA as
referred in Annexure A thereof under sub-section (2) of section 17.
11. As per Rule 6E, every petition shall set forth- (i) The name of the company, with its status; (ii) Date of
incorporation; (iii) The address of its registered office; (iv) Authorized capital, paid up capital with division
of different classes of shares and terms of issue if any, in the case of preference shares; (v) Main
objects in brief for which the company was formed; (vi) Present business activities of the company,; (vii)
Grounds for such petition and the nature of relief (s) prayed for.
12. As per new rule 6F a petition under section 17 in Form 24AAA, shall be accompanied following documents
specified in Annexure E:- (i) Copy of Petition in form 1 (ii) Affidavit verifying the Petition. (iii) Copy of
notice calling for the meeting with Explanatory Statement (iv) Copy of the Special Resolution sanctioning
the alteration by the members of the company. (v) Copy of the minutes of the meeting at which the
Special Resolution was passed. (vi) Memorandum of appearance with copy of Board Resolution or the
executed vakalatnama, as the case may be (vii) Affidavit providing dispatch and service of notice together
with newspaper cuttings (viii) Affidavit verifying list of creditors as per regulation 36(7). (ix)
Acknowledgement receipt from the Chief Secretary of State Government/Administrator wherever
applicable.
Documents referred above may be attested as a true copy by the party or the authorized representative
or the advocate. Where the petition is filed by the authorized representative, memorandum of appearance
shall be appended to the petition as in Form 2 as referred in Annexure E.
13. Where the petition seeks to shift the registered office of the company from one State to another, a notice
together with copy of the petition shall also be served by the company, by registered post, on the Chief
Secretary to the Government of the State in which the registered office of the company is situated in a
Union Territory, to the Administrator of the union territory.
The purpose of this notice is to give a chance to the State Government/ Union Territory to oppose the
petition on certain cogent grounds. However, only probable loss of revenue to the State on account of
shifting of the registered office of the company is not a valid ground for refusing to confirm the alteration
to the memorandum so as to change the registered office of the company.
68 PP-ACL&P

14. Any person intending to oppose the petition shall within twenty-one days from the date of service or
publication of the notice, as the case may be, deliver, or cause to be delivered, or send by registered
post, the objections supported by an affidavit, in original, to the Regional Director and shall also serve a
copy of the objections to the company at its registered office.
15. If no response is received by the Regional Director within the time specified in sub-rule (3), all the
person concerned shall be deemed to have consented to the alteration proposed in the petition. The
Regional Director may, if he thinks fit, permit any person to file objections, even after the final hearing
after giving notice to the company.
16. The company shall prove the dispatch, publication and service of the notice by an affidavit and such
affidavit shall be enclosed with the petition.
17. A petition under section 17 shall contain a list stating the names and addresses of the creditors and
debenture holders and amount due to each of them up to the latest practicable date preceding the date
of filing of the petition which shall not precede the date of filing the petition by more than one month.
18. Duly authenticated copy of the list of creditors and debenture-holders showing their names, addresses
and the amounts due to each of them shall be kept at the registered office of the company and any
person desirous of inspecting the same may, at any time, during normal working hours of the business,
inspect and take extracts of the same on payment of fifty rupees to the company.
19. The company secretary and not less than two directors of the company, one of whom shall be a managing
director, where there is one shall file an affidavit to the effect that they have made a full inquiry into the
affairs of the company and , having done so have formed the opinion that the list referred to in sub rule
(6) is correct , and the estimated values as given in the list of the debts or claims payable on a contingency
or not ascertained are proper estimates of the values of such debts and claims included in the list and
the same are borne out by the books and records of the company and that there are no other debts or
claims against, the company to their knowledge.
20. The company secretary must enclose with the petition, memorandum of his appearance before the
Regional Director as and when summoned and the same should be accompanied by a certified copy of
the resolution authorising him to make the petition on behalf of the company and also to appear before
the Regional Director and represent the company in all proceedings related to the petition of the company
before the Regional Director and any other agency.
21. Prescribed fees for the petition shall be paid online at the time of filing the petition and a proof of having
paid the same is required to be attached to the petition.
22. Where no objection has been received from any parties, the Regional Director may pass necessary
orders with or without hearing.
23. On receipt of the order of the Regional Director confirming the alteration, the company should file e-form
21 of the Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006,
along with copy of the order of the Regional Director, within three months from the date of the order. The
Registrar shall register the same and certify the registration under his hand within one month from the
date of filing of copy of the order [Refer clause (b) of Sub-section (1) of Section 18].
24. The certificate shall be conclusive evidence that all the requirements of the Act with respect to the
alteration and the confirmation thereof have been complied with and henceforth the memorandum so
altered shall be the memorandum of the company [Refer Sub-section (2) of Section 18].
25. Since the alteration involves transfer of registered office of the company from one State to another, the
company shall file a certified copy of the order confirming the alteration with the Registrar of each State,
and the Registrar of each such State shall register the same, and shall certify under his hand the
Lesson 2 Procedure for Alteration of Memorandum And Articles 69

registration thereof; and the Registrar of the State from which such office is transferred shall send to the
Registrar of the other State all documents relating to the company registered, recorded or filed in his
office [Refer Sub-section (3) of Section 18].
26. The change of address of the registered office shall be effective from the date of issue of registration
certificate by the Registrar of Companies of the State to which the registered office is shifted.
27. Within thirty days from the date when the change becomes effective, the company should file with the
Registrar of the State where the registered office has been shifted, notice of change in e-form 18 along
with the prescribed filing fee. It has to be stated in e-form 18 whether Registered Office is Owned by
company; or Owned by Director (not taken on lease by company) or Taken on Lease by Company or
Owned by any other entity/Person (Not taken on lease by company). E-form 18 is to be pre-certified by
any one of these professionals - company secretary or chartered accountant or cost accountant (in
whole-time practice). Further the company secretary or chartered accountant or cost accountant (in
whole-time practice) has to personally visit the new registered office address or premises of the company
and has to verify that the company actually exists at this address. In this context, he also has to certify
that he has personally visited the new registered office address and is of the opinion that the premises
are indeed at the disposal of the applicant company. Following documents have to be attached to e-
Form 18:
(a) Proof of Registered Office address which is mandatory attachment
(b) No-objection certificate from director if registered office is owned by director (not taken on lease by
company)
(c) A proof that the company is permitted to use the address as the registered office of the company if
the same is owned by any other entity/Person (not taken on lease by company).
28. Issue a general notice by way of an advertisement in newspaper(s) informing the members of the
company all other concerned persons about the change of place of the registered office of the company
so that they may address all future communications to the company at its new address.
29. The address of the registered office of the company must also be changed on all items of stationery,
letter heads, bills forms, invoice forms, sign boards and at all other places wherever it occurs.
30. The stock exchanges, where the securities of the company are listed, should also be promptly informed
about the change of place of the registered office of the company.
31. Correct the address of the registered office of the company on all records, registers including the register
of members, share certificates, sign board, name plate etc.
(iv) Procedure for changing the situation of registered office of a Producer Company [Section 581H]
A producer company desirous of shifting its registered office from the jurisdiction of one Registrar to another is
required to take the following procedural steps:
1. Hold a Board meeting
(i) to pass a resolution, for shifting the registered office of the company from the jurisdiction of one
Registrar to another;
(ii) to pass a resolution fixing time, date and venue for holding general meeting of the company for
passing a special resolution pursuant to the proviso to Sub-section (3) of Section 581H of the
Companies Act, 1956;
(iii) to pass a resolution approving notice of the general meeting and the explanatory statement annexed
thereto ; and
70 PP-ACL&P

(iv) to pass a resolution authorising the Company Secretary/Director to issue the notice of the general
meeting on behalf of the Board of directors of the company.
2. Issue notice of the general meeting and the explanatory statement annexed thereto to each member,
each director and the auditors of the company.
3. A general notice of the general meeting may also be published in newspapers.
4. Hold the general meeting and pass the special resolution as per notice of the general meeting.
5. File e-form 23 with both the Registrars along with certified copies of special resolution certified by two
directors and the explanatory statement annexed to the notice of the general meeting within thirty days
alongwith the prescribed filing fee. Thereafter each Registrar shall record the same and thereupon the
Registrar from whose jurisdiction the office is transferred, shall forthwith forward to other Registrar all
documents relating to Producer Company.
6. The company should obtain a certificate of registration of the confirmation order from the Registrar of
Companies who shall certify under his hand within one month from the date of filing of such confirmation
order.
7. Such certificate shall be conclusive evidence that all the requirements of this Act for the alteration and
confirmation have been complied with and henceforth the memorandum of association so altered shall
be the memorandum of association of the company.
The alteration of provisions of memorandum of Producer Company relating to the change of place of its registered
office from one state to another shall not take effect unless it is confirmed by CLB* on petition.
Point need to Know
Alteration of the memorandum in the case of a banking company also requires a no objection certificate from
the Reserve Bank of India vide section 49-C of the Banking Regulation Act, 1949.

4. LIABILITY OF DIRECTORS ETC. TO BE MADE UNLIMITED


A limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to
render unlimited the liability of its directors or of any director or manager [Refer Sub-section (1) of Section 323
of the Act].
Sub-section (2) of Section 323 lays down that upon the passing of any such special resolution, the provisions
thereof shall be as valid as if they had been originally contained in the memorandum;
Provided that no alteration of the memorandum making the liability of any of the officers referred to above,
unlimited shall apply to such officer, if he was holding the office before the date of the alteration, until the expiry
of his term, unless he has accorded his consent to his liability becoming unlimited.
The liability clause of Producer Company cannot be altered, as the liability of a Producer Company is, essentially,
always intended to be limited.
In case of Producer Company, when the directors vote for a resolution or approve by any other means, anything
done in contravention of the provisions of this Act or any other law for the time being in force, or the articles, they
shall be jointly and severally liable to the company to make good any loss or damage suffered by the Producer
company. [Section 581T]
Where as a result of the above, such director has made any profit, the Producer Company shall have the right
to recover an amount equal to the profit from the director.

* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come
into effect.
Lesson 2 Procedure for Alteration of Memorandum And Articles 71

The liability imposed shall in addition and not in derogation of a liability imposed on a director under this Act or
any other law for the time being in force.
Section 32(1) of the Companies Act, 1956 lays down that a company registered as unlimited may register under
the Act as a limited company.
Sub-section (2) of Section 32 provides that on registration in pursuance of Sub-section (1), the Registrar shall
close the former registration of the company and may dispense with the delivery to him of copies of any documents
with copies of which he was furnished on the occasion of the original registration of the company, but the
registration shall take place in the same manner and shall have effect, as if it were the first registration of the
company under the Act.
The registration of an unlimited company as a limited company under this section shall not affect any debts,
liabilities, obligations or contracts incurred or entered into by, to, with or on behalf of, the company before the
registration, and those debts, liabilities, obligations and contracts may be enforced in the manner provided by
Part IX of the Act in the case of a company registered in pursuance of that part [Refer Sub-section (3) of Section
32].
For getting an unlimited company registered as a limited company, the Board of directors of the unlimited
company will be required to follow the whole procedure which is required to be followed for the formation and
incorporation of a new limited company, e.g., (i) name availability will have to be obtained from the concerned
Registrar of Companies by making an application in the prescribed e-form 1A and paying the prescribed fee of
` 1000/-; and (ii) on receipt of name availability intimation from the Registrar, to have the memorandum and
articles of the proposed company drafted, stamped, signed and filed with the Registrar for getting the same
incorporated under the Act. On incorporation of the limited company, the assets and liabilities of the erstwhile
unlimited company may be taken over by the limited company and the members of the unlimited company be
paid either in cash or in the form of shares in the share capital of the limited company. The unlimited company
shall be declared defunct with due process of law.

II. ALTERATION OF ARTICLES OF ASSOCIATION OF A COMPANY


Section 31 of the Companies Act, 1956 lays down that subject to the provisions of the Act and to the conditions
contained in its memorandum, a company may, by a special resolution, alter its articles;
Provided no alteration made in the articles under this sub-section, which has the effect of converting a public
company into a private company, shall have effect unless such alteration has been approved by the Central
Government (Registrar of Companies).
Sub-section (2) of Section 31 states that any alteration so made shall, subject to the provisions of the Act, be as
valid as if originally contained in the articles and be subject, in like manner, to alteration by special resolution.
Where any alteration such as is referred to in the proviso to Sub-section (1) has been approved by the Central
Government, a printed copy of the articles as altered shall be filed by the company with the Registrar within one
month of the date of receipt of the order of approval.
A company may alter its articles in accordance with the above provisions in any of the manners mentioned
below:
(i) by adoption of new set of articles;
(ii) by addition/insertion of a new article;
(iii) by deletion of an article;
(iv) by amendment of a specific article; or
(v) by substitution of a specific article.
72 PP-ACL&P

1. Procedure for Altering Articles of Association


A company which proposes to alter its articles of association has to follow the procedure detailed below:
1. Convene and hold a Board meeting to
(i) Consider and decide which of the articles are to be changed/altered and pass a formal resolution in
this respect.
(ii) Fix time, date and venue for holding a general meeting of the company for passing a special resolution
as required by Section 31 of the Companies Act, 1956.
(iii) Approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act.
(iv) Authorise the Company Secretary or any other competent officer of the company to issue notice of
the general meeting as approved by the Board.
While deciding on alteration of the articles, the Board of directors of the company must make sure that
none of the proposed alterations increases the liability of any member who has become so before the
alteration so as to oblige him to contribute to the share capital of, or otherwise to pay money to, the
company, nor should any alteration provide for expulsion of a member by the company.
The Board must also ensure that none of the proposed alterations converts a public company into a
private company, in which case, the company shall have to obtain approval of the Central Government
to such alteration [Refer to proviso to Sub-section (1) of Section 31].
2. On the conclusion of the Board meeting, send to the stock exchanges, where the securities of the
company are listed, particulars of the proposed alteration of the articles of association of the company.
3. Issue notice of the general meeting along with the explanatory statement, to all the members, directors
and the auditor of the company.
Also forward three copies of the notice of the general meeting to the concerned stock exchanges as per
the Listing Agreement.
4. Hold the general meeting and have the special resolution passed.
(For specimens of the special resolution for altering the articles of association of the company in different
ways, please see Annexures XI, XII, XIII and XIV at the end of this study).
Note: If the company is a listed company and the alteration of articles of association relates to insertion
of the provisions defining a private company then ensure that the Special Resolution as aforesaid is
passed only through postal ballot. (Please refer Companies (Passing of Resolutions by Postal Ballot)
Rules, 2011).
5. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the
Listing Agreement.
6. File with the ROC, e-form 23 along with a certified copy of the special resolution and the explanatory
statement annexed to the notice of the general meeting at which the resolution was passed and a copy
of the Articles of Association, within thirty days of the passing of the resolution along with the prescribed
filing fee.
7. Make necessary changes in all the copies of the articles of association of the company lying in the office
of the company.
Note:
(i) A company, which has been granted a license under section 25 of the Act, must submit a draft of the
Lesson 2 Procedure for Alteration of Memorandum And Articles 73

proposed alterations to the Registrar of Companies before convening a general meeting for passing a
special resolution to approve the alterations.
(ii) If the proposed alteration to the Articles is inconsistent with an order issued by the CLB under section
397 or 398 of the Act, the company should make an application to the Principal Bench of the CLB for an
order granting leave [Section 404(1)].
A copy of the order of the CLB granting leave under section 404(1) to alter the articles should be filed as an
attachment to e-Form No. 21 prescribed under the Companies (Central Government's) General Rules & Forms,
1956. The form is required to be filed electronically with the Registrar within 30 days of receipt of the order.

2. Procedure for Alteration of Articles of Producer Company [Section 581 I]


(1) The amendment of articles shall be proposed by not less than two third of the elected directors or by not
less than one third of the members of the Producer Company.
[The Procedure for holding Board and General meeting is same as mentioned earlier].
(2) Members shall adopt the amendment by a special resolution.
(3) File with the Registrar of Companies, e-Form No. 23 along with the copy of special resolution and
amended articles, both duly certified by two directors and the explanatory statement annexed to the
notice of the general meeting and a copy of the Articles of Association within 30 days from the date of
passing the special resolution.
(4) Make necessary changes in all the copies of the articles of association of the company lying in the office
of the company so that no unaltered copy is issued to any person.

3. Effect of Alteration of Articles


Articles cannot be altered, if the alteration is repugnant to, or inconsistent with, any statute or general law or it is
such as to defeat the provisions of any law. The articles cannot be altered to enable a company to carry on an
illegal scheme (lottery business). (Pioneer Mutual Benefit Society v. Asst. Registrar, (1933) 3 Com Cases 37, 40
: AIR 1933 Mad 129.
All members become bound by a valid alteration whether they voted for or against it (Hari Chandana Yoga Deva
v. Hindustan Co-op. Insurance Society Ltd., AIR 1925 Cal 690. A provision of the Articles which has the effect of
limiting the companys share capital to a fixed amount would have no effect being contrary to the Act. [Muheer
Hemant Mafatlal v. Mafatlal Industries Ltd., (1987) 89 Bom LR 86(Bom).
Stringent provisions can be made in the Articles so long as they are not contrary to the provisions of the Act.
Where the Act provides for an ordinary resolution for transacting a particular business, the articles may provide
for a special resolution. Likewise, a public company which is required to give 21 days notice for a general
meeting may provide in its articles to give 30 days notice. Such a public company cannot, however provide for
giving less than 21 days notice.
In Tapas Sinha Roy v. Linkman Services P. Ltd., (2007) 77 CLA 340 (CLB) it was held that the power of alteration
can be exercised only in good faith in the interests of the company as a whole. A discriminatory amendment
depriving some members of their rights qua members would be struck down as invalid. The articles were altered
in this case to enable the company to forfeit fully paid shares.

4. Financial Year of a Company


The term financial year has been defined in Section 2(17) of the Companies Act, 1956. It says financial year
means, in relation to any body corporate, the period in respect of which any profit and loss account of the body
corporate laid before it in annual general meeting is made up, whether that period is a year or not.
74 PP-ACL&P

Section 210(1) of the Act lays down that at every annual general meeting of a company held in pursuance of
Section 166 of the Act, the Board of directors of the company shall lay before the company
(a) a balance sheet as at the end of the period specified in Sub-section (3), and
(b) a profit and loss account for that period.
Sub-section (4) of the Section lays down that the period to which the account aforesaid relates is referred to in
this Act as a financial year; and it may be less or more than a calendar year, but it shall not exceed fifteen
months. Beyond 15 months and up to 18 months, it can be extended with the special permission of the Registrar
of Companies.
The regulations in Table A of Schedule I to the Companies Act, 1956 do not contain any provision as to the
manner of determination of financial year immediately after the incorporation of a company nor do they contain
any regulation conferring authority on Board or putting some restrictions on the Board of the company altering
the financial year of the company.

Authority to determine and alter financial year of a company


Section 291 of the Companies Act entitles the Board of directors of a company to exercise all such powers, and
to do all such acts and things, as the company is authorised to exercise and do. The Board of directors of a
company may accordingly fix the financial year of the company at the companys first meeting immediately after
incorporation. The Board is also authorised to alter the financial year of the company at any point of time,
provided such an alteration is in accordance with the provisions of Section 210 of the Companies Act and is
effected by the Board only in the interest of the company.
The determination of financial year of a company and its alteration thereafter at any point of time is not a matter
which is required to be exercised or done by the company in general meeting.

Procedure for Changing the Financial Year of the Company


(1) Convene a Board meeting after giving notice of the meeting in writing to every director of the company
for the time being in India and at his usual address in India to every other director [Refer section 286 of
the Act].
(2) The notice must contain time, date and venue for the meeting and detailed agenda of the business to be
transacted thereat.
Among other items of business proposed to be transacted at the meeting, the chairman and/or the
managing director must give in precise terms the proposal for the determination of the companys
financial year in the case of the first meeting of the Board after incorporation of the company, or for
changing the period of the financial year in the case of any subsequent meeting of the Board giving
reasons for the change.
(3) Hold the Board meeting and get the required resolution passed for adoption of a new financial year and
also approve preparation of next accounts for the new period which may be more or less than a year.
Such period cannot exceed 15 months. It can be extended upto 18 months with the special permission
of the Registrar of Companies. (For specimen of Board Resolution see Annexure XV)
(4) If the financial year is extended beyond a period of twelve calendar months and the company requires
more time to finalise the accounts, the company should also pass a board resolution for postponing
submission of accounts to an annual general meeting. The company should also apply to the Registrar
of Companies for obtaining extension of time for holding the annual general meeting of the company,
pursuant to the second proviso to Sub-section (1) of Section 166 of the Companies Act, 1956. Such
extension cannot exceed three months.
Lesson 2 Procedure for Alteration of Memorandum And Articles 75

(5) The application under section 210 (4) or section 166 (1) should be made in e-form 61 along with the
requisite filling fee as per schedule X of the Act. (For specimen e-form 61 please refer the CD provided
along with the Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html).
Attach following documents with the application:
(a) Board resolution
(b) Reasons for extension of financial year
(c) Period for which extension is required.
(d) Detailed application
(6) The consent of the Assessing Officer of the Income Tax department is also required to be obtained
by the company.
(7) Due information to all concerned is also required to be given by the company.

ANNEXURES
ANNEXURE I(a)
SPECIMEN BOARD RESOLUTION FOR CHANGE OF NAME
RESOLVED THAT
(a) subject to the approval by the Company by a special resolution to be passed at a general meeting and
of the Central Government under section 21 of the Companies Act, 1956, the name of the Company be
and is hereby changed from ..... Ltd. to any of the following names in the order of preference:
(i) ..... Ltd.
(ii) ...... Ltd.
(iii) .....Ltd.
(iv) .....Ltd.
(v) .....Ltd.
(vi) .....Ltd.
or such other name as may be allowed by the Registrar of Companies.
(b) the Company Secretary be and is hereby authorised to make the application in e-form 1A to the Registrar
of Companies for ascertaining the availability of the proposed name(s) and an application for approval
for the change of name as above and to do such other acts, things and deeds as may be necessary to
do to give effect to this resolution.
ANNEXURE I(b)
SPECIMEN OF THE SPECIAL RESOLUTION FOR CHANGE OF
NAME OF THE COMPANY
RESOLVED THAT
(i) subject to the approval of the Central Government, pursuant to the proviso to Section 21 of the Companies
Act, 1956, as a consequence of the conversion of the company from a private limited company into a
public limited company, the name of the company be and is hereby changed from ............ Private
Limited to .......... Limited; and
(ii) clause I (name clause) in the memorandum of association of the company be and is hereby altered by
substituting the same with the following:
76 PP-ACL&P

I. The name of the company is .....................Limited.


Explanatory Statement
The Board of directors of the company had, at its meeting held on ......., resolved that consequent upon conversion
of the company from private limited company to public limited company, the name of the company be changed
from ............ Private Limited to .......... Limited and accordingly clause I (name clause) in the
memorandum of association of the company is to be altered by substituting the same with a clause as set out in
the notice for approval of the shareholders of the company.
No director is concerned or interested in the proposed resolution.
Note: The above special resolution is a composite one for change of name of the company and also for change of
name clause in the memorandum of association of the company. Alternatively, the company may pass two separate
special resolutions viz., (i) for change of name of the company and (ii) for change of clause I (name clause) in the
memorandum of association of the company. In such a case part (ii) of the resolution need not be incorporated in
the above resolution and in addition the following special resolution (Annexure II) may also be passed.
ANNEXURE II
SPECIMEN OF THE SPECIAL RESOLUTION FOR ALTERING THE MEMORANDUM OF ASSOCIATION
(NAME CLAUSE) OF THE COMPANY
RESOLVED THAT pursuant to Section 16 of the Companies Act, 1956, and consequent upon conversion of the
company from a private limited company into a public limited company, clause I (name clause) of the memorandum
of association of the company be and is hereby altered by substituting the same with the following:
Clause I. The name of the company is ............... Limited.
Explanatory Statement
The Board of directors of the company had, at its meeting held on ......., resolved that consequent upon conversion
of the company from private limited company to public limited company, the name of the company be changed
from ............ Private Limited to .......... Limited and accordingly clause I (name clause) in the memorandum of
association of the company is to be altered by substituting the same with new clause I as set out in the notice.
Hence, the proposed special resolution is commended for approval by the members.
No director is concerned or interested in the proposed resolution.
ANNEXURE III(a)
SPECIMEN OF BOARD RESOLUTION FOR ALTERATION OF
OBJECTS CLAUSE OF MEMORANDUM
RESOLVED THAT
(a) subject to the approval of the members of the Company, by a special resolution at a general meeting
and such other statutory approvals as may be necessary, the objects clause of the memorandum of the
company be and is hereby altered by inserting new clauses in Clause ............. thereof as set out below:
(i) ............................................................................................................................................................;
(b) a special resolution according approval to the proposed alterations by the members of the company be
and is hereby proposed at the________ annual general meeting/extraordinary general meeting to be
convened and held on____ at____ at the registered office of the company and the Company Secretary
be and is authorized to issue notice of the said meeting together with the related explanatory statement,
in accordance with the draft placed before this meeting (as initialed by the Chairman), in accordance
with the provisions of Companies Act, 1956, and the articles of association of the company.
Lesson 2 Procedure for Alteration of Memorandum And Articles 77

ANNEXURE III(b)
SPECIAL RESOLUTION FOR AMENDING THE OBJECTS CLAUSE OF THE MEMORANDUM OF
ASSOCIATION
RESOLVED that pursuant to the provisions of Section 17 of the Companies Act, 1956, Clause III being the
objects clause of the Memorandum of Association of the company be and is hereby altered as follows :
(i) To substitute the following sub-clause in place of the existing sub-clause (h):
(h) to borrow or raise money or to invite, receive or accept money on deposit for the purposes of the company
(not amounting to the business of banking as defined under the Banking Regulation Act, 1949) in such
manner and upon such terms and conditions as may seem expedient and to secure or arrange the repayment
thereof by the company and create, issue and allot redeemable or irredeemable bonds, mortgages or other
instruments, mortgage debentures, secured or unsecured debentures issuable or payable either at par or at
premium or discount or as partly or fully paid and for any such purposes to charge all or any part of the
property and profits of the company both present and future including its uncalled capital.
(ii) The following new sub-clauses be and are hereby added after the sub-clause 3(de):
(df) to carry on the business of manufacturers and processors of and dealers in paper, pulp and boards
of all kinds and articles made from paper, pulp and boards of every description and materials or
chemicals or agents used in the manufacture or treatment of paper and board including card boards
and their by-products.
(dg) To carry on the business of manufacturers, installers, maintainers and repairers of and dealers in
mechanical, electrical and electronic audio visual appliances, and apparatus of every description
and of in radio, television, telecommunication requisites and suppliers of dynamos, accumulators,
lamps and all apparatus now known or that may be invented in connection with the generation,
accumulation, distribution and supply and employment of electricity including all cables, wires and
appliances and glasses, cells, integrated circuits, electric posts, autometers, and other electrical
and electronics apparatus and appliances and stores of all kinds.
(dh) To manufacture, sell, distribute, deal or trade in electrical and mechanical goods, equipments,
accessories, components spares of all kinds, mechanical devices, wagons, tanks, galvanised iron
pipes, conduit pipes.
(di) To carry on the business of and act as merchants, traders, commission and mercantile agents,
clearing agents, shipping agents whether within or outside the territory of the Union of India and to
import, export, buy, sell, barter, exchange, pledge, make advance upon or otherwise deal in goods,
produce, articles and merchandise including capital and consumable goods.
(dj) To carry on the business of and as general electrical and mechanical engineers, founders, fabricators,
manufacturers and dealers in iron, steel and alloys, engineering, mechanical and electrical apparatus
and goods plants and machineries and equipments of various kinds and the manufacture, sale or
hire of apparatus and goods, to which the application of electricity or any other power is or may be
useful, convenient, ornamental or otherwise necessary.
(dk) To manufacture, produce, use, buy and sell and otherwise deal or trade in any and all metallurgical,
electro chemical and electro thermal products in elemental, alloy or composite forms and all or any
formulate compositions, consisting or partly consisting of the foregoing or any of them and all or any
converted or fabricated products and articles of the foregoing or any of them.
(dl) To carry on the business as manufacturers and dealers of different kinds of cement, portland cement,
cement products and building materials.
78 PP-ACL&P

(dm) To carry on the business of financial and investment consultants, agents, underwriters and to render
financial and management services.
(iii) The following sub-clauses be and are hereby added after the existing sub-clause m(iii):
m(iv) To sub-let all or any contracts from time to time and upon such terms and conditions as may be
thought expedient.
m(v) To establish, provide, maintain or conduct otherwise schools, colleges, research laboratories,
technical management and cultural institutions and experimental workshops for scientific and
technical research and development and undertake experiments and carry on scientific and
technical researches, experiments and tests of kinds, to promote studies and researches,
scientific and technical investigations and innovations and developments by providing,
sponsoring, subsidising or assisting laboratories, workshops, libraries, lecture meetings, seminars
and conferences and by providing or contributing to the remuneration of scientific or technical
professors, experts or otherwise qualified and competent persons and by providing or contributing
to the award of scholarships, prizes, grants to students or otherwise and generally encourage,
promote and reward studies, researches, investigations, experiments, tests and inventions of
any kind that may be considered likely to assist any business which the company is authorised
to carry on.
m(vi) To insure any of the properties, undertakings, contracts, guarantees or obligations of the company
of every nature and kind in any manner whatsoever.
m(vii) To promote, carry on, maintain and develop, trade of all kinds, industrial and financial relations
of every kind and description in all matters with the objects of the company.
m(viii) To subscribe, contribute, pay, transfer or guarantee money for or to dedicate, donate, present
or otherwise dispose of either voluntarily or for value, any moneys or properties of the company
to or for the benefit of any public, local, general or useful objects, purposes or institutions or for
any exhibition or for any purpose which may be considered likely directly or indirectly to further
the objects of the company or the interests of its members.
m(ix) To carry on any other trade, business, or undertaking which it may seem to the company capable
of being conveniently carried on in connection with any of the companys objects or calculated
directly or indirectly to enhance the value of or render profitable any of the companys property
or rights or which it may be advisable to undertake with a view to improving, developing, rendering
valuable or turning to account any property movable or immovable belonging to the company or
in which the company may be interested.
m(x) To subscribe for, underwrite, purchase or otherwise acquire, and to hold, dispose of and deal
with the shares, stocks, securities and evidences of indebtedness or of the rights to participate
in profits, assets or other similar documents issued or to be issued by any Government authority,
corporation or body, or by any other company and any option or rights in respect thereof.
m(xi) To acquire debentures, debenture stock bonds, obligations or securities by original subscription,
participation in syndicates, tender, purchase, exchange or otherwise and to subscribe for the
same either conditionally or otherwise and to guarantee the subscription thereof and to exercise,
enforce all rights and powers conferred by or incident to the ownership thereof.
Explanatory Statement
Your Board has to consider from time to time proposals for diversification into areas which would be profitable
for the company as part of diversification plans. For the purpose of the objects clause of the company which is
presently very restricted in scope, requires to be so made out as to cover a wide range of activities to enable
Lesson 2 Procedure for Alteration of Memorandum And Articles 79

your company to consider embarking upon new projects and activities considered to be convenient, advantageous
and feasible for the companys business. Certain incidental powers are also being added for the convenience of
the Companys operations. Your Directors recommend that the special resolution be passed.
None of the Directors of the Company is interested or concerned in the said resolution except as members of
the Company.
ANNEXURE IV
SPECIMEN OF BOARD RESOLUTION FOR SHIFTING THE REGISTERED OFFICE OF THE COMPANY
TO ANOTHER PLACE WITHIN LOCAL LIMITS
RESOLVED THAT
(i) the registered office of the company be and is hereby shifted from its present situation at ......................
to............................................................., a place falling under the jurisdiction of .......................... police
station and within the local limits of the town where the registered office of the company is presently
situated; and
(ii) the Company Secretary, Shri............., be and is hereby authorised to file with the concerned Registrar
of Companies, the prescribed e-Form No. 18 containing notice of change in the situation of the registered
office of the company.
ANNEXURE V
SPECIMEN OF BOARD RESOLUTION APPROVING NOTICE OF THE
EXTRAORDINARY GENERAL MEETING
RESOLVED THAT the notice, together with the explanatory statement required to be annexed to the notice
under Section 173(2) of the Companies Act, 1956, of the extraordinary general meeting of the company to be
held at .......... (time) ............... (date) .................. (month) 200........, for passing the special resolution as
required under Sub-section (2) of Section 146 of the Companies Act, 1956 for shifting the registered office of
the company from its present situation at ................... ........................................ to ..............................., a place
falling under the jurisdiction of .......................... police station and outside the local limits of the town where
the registered office of the company is presently situated, a draft whereof was placed before the meeting and
was initialled by the chairman of the meeting for the purpose of identification, be and is hereby approved.
ANNEXURE VI
SPECIMEN OF BOARD RESOLUTION AUTHORISING THE COMPANY SECRETARY TO ISSUE NOTICE
OF THE EXTRAORDINARY GENERAL MEETING
RESOLVED THAT Shri ............................, the Company Secretary, be and is hereby authorised to issue, on
behalf of the Board of directors of the company, the notice and the explanatory statement required to be
annexed to the notice under section 173(2) of the Companies Act, 1956, as approved by the Board, of the
extraordinary general meeting of the company to be held at ............ Hrs. on..........(date)...............(month)
200........ for passing the special resolution under Section 146(2) of the Companies Act, for shifting the registered
office of the company from its present situation to a place of ................... falling under the jurisdiction of
.......................... police station which is outside the local limits of the city where it is presently situated.
ANNEXURE VII
SPECIMEN OF SPECIAL RESOLUTION FOR SHIFTING THE REGISTERED OFFICE OF THE COMPANY
TO ANOTHER PLACE OUTSIDE THE LOCAL LIMITS BUT WITHIN THE SAME STATE
RESOLVED THAT - (i) pursuant to the proviso to Sub-section (2) of Section 146 and other applicable provisions,
if any, of the Companies Act, 1956, the registered office of the company be and is hereby shifted from its
80 PP-ACL&P

present situation at ................................................to........................................................, a place falling under


the jurisdiction of .......................... police station which is situated outside the local limits of the town where it
is presently situated, but which is situated within the same State; and
(ii) Shri ............., the Company Secretary, be and is hereby authorised to file with the concerned Registrar of
Companies, the prescribed e-Form No. 18 containing notice of change in the situation of the registered office
of the company.
Explanatory Statement
The registered office of the company is situated at ................... (a small town).................... Often it becomes
difficult to arrange the required facilities for holding the companys annual general meetings in accordance with
Section 166 of the Companies Act, 1956, which are required to be held at the registered office of the Company
or at a place within the local limits of the same town. Therefore, the Board of directors of the company, at its
meeting held on ................, resolved that the registered office of the company is to be shifted to ..................., a
place outside the local limits of the town where the companys registered office is presently situated but which is
within the same State, where it would be possible for the company to hold its annual general meetings more
conveniently as all the required facilities are available there. Moreover, the companys Central, Administrative
and Marketing Offices are already situated there.
The Board, therefore, recommends the proposed special resolution to the members of the company for their
consideration and approval.
None of the directors of the company is concerned or interested in the proposed resolution.
ANNEXURE VIII
SPECIMEN RESOLUTION FOR CHANGE OF REGISTERED OFFICE OUTSIDE LOCAL LIMITS OF CITY,
TOWN OR VILLAGE FROM THE JURISDICTION OF ONE REGISTRAR TO ANOTHER WITHIN THE
SAME STATE
Resolved that the Registered Office of the Company be and is hereby shifted from............. to............. which
is outside the local limits of city, town or village but from the jurisdiction of one registrar to another within the
same state where the companys registered office is presently situated with effect from ............. subject to
confirmation by the Regional Director.
Explanatory Statement
The registered office of the company is situated at............. while the administrative office is situated at .............
For administrative convenience and better control over the operations it is proposed to shift the Registered
office from............. to ............. Since the new place is within the jurisdiction of another Registrar of Companies,
this requires prior approval of the Regional Director. Hence it is proposed to pass a special resolution for this
purpose. No Director is interested or concerned in this resolution.
ANNEXURE IX
SPECIMEN OF BOARD RESOLUTION FOR SHIFTING
THE REGISTERED OFFICE FROM ONE STATE TO ANOTHER
RESOLVED THAT
(a) subject to the approval of members of the Company by a special resolution at a general meeting and
confirmation of the Regional Director under section 17 of the Companies Act, 1956 and subject to such
other approvals as may be necessary, the registered office of the Company be and is hereby shifted
from its present location to the State/Union Territory of_____ and Clause___ of the memorandum of the
company be and is hereby altered accordingly;
Lesson 2 Procedure for Alteration of Memorandum And Articles 81

(b) a special resolution according approval to the proposed alterations by the members of the Company be
and is hereby proposed at the ____ annual general meeting/extra-ordinary general meeting to be
convened and held on ____ at ____ at the registered office of the company and the Company Secretary
be and is hereby authorised to issue notice of the said meeting together with related explanatory statement,
in accordance with the draft placed before this meeting, to the members of the company in accordance
with the provisions of Companies Act, 1956 and the articles of association of the company;
(c) M/s.____________ Advocate/Secretary in whole-time practice/practising Chartered Accountant/practising
Cost Accountant be and is hereby authorised to appear and represent the Company before the Regional
Director, in the matter of the petition to be filed for their confirmation to the proposed alteration of the of
the memorandum as to the change of the place of the registered office from one State to another and
are also authorised to make such statements, furnish such information and do such acts, deeds and
things as may be necessary in relation to the said petition;
(d) Mr.___________ director, Mr.____________, director, and Mr. __________, secretary, be and are hereby
authorised jointly and severally to sign the said petition/application, affidavits and such other documents
as may be necessary in relation to the said petition.
ANNEXURE X
SPECIMEN OF SPECIAL RESOLUTION FOR ALTERING THE MEMORANDUM OF THE COMPANY SO
AS TO CHANGE THE SITUATION OF ITS REGISTERED OFFICE TO ANOTHER STATE
RESOLVED THAT
(i) pursuant to Section 17(1) and other applicable provisions, if any, of the Companies Act, 1956 and
subject to confirmation by the Regional Director, as prescribed in Sub-section (2) of the said section, the
memorandum of association of the company be altered so as to change the place of the companys
registered office from its present situation at................. ....................................in the State of Maharashtra
to ................................., a place in the State of Gujarat, by substituting the words in the State of
Maharashtra for the words in the State of Gujarat in Clause II of the memorandum of association of
the company.
(ii) Shri ................, the Company Secretary, be and is hereby authorised
(i) to sign and file, the petition under Sub-section (2) of Section 17 of the Act to the Regional Director
for securing confirmation to the alteration to the memorandum of association of the company so as
to change the place of the Registered office of the company from the State of Maharashtra to the
State of Gujarat;
(ii) to represent the company in all hearings concerning the petition of the company; and
(iii) to appoint, on behalf of the company, Company Secretaries in whole-time practice, advocates,
lawyers, counsels and other consultants, if and when required, to represent the company and plead
on its behalf before the concerned Regional Director and or any other agency in all matters connected
with the petition of the company.
Explanatory Statement
When the company was incorporated it was decided that the main manufacturing unit of the company would be
located in the State of Maharashtra and in the memorandum of association it was stated that the registered
office of the company would be situated in that State.
Subsequently it was found that the location of the main manufacturing unit in the State of Gujarat would be more
advantageous to the company. At present, all the factories of the company are located in the State of Gujarat.
For better management and control, the Head Office of the company has already been shifted to Ahmedabad.
82 PP-ACL&P

No useful purpose would be served by continuing to keep the companys registered office in the State of
Maharashtra. Moreover, 90% of the members of the company have their registered addresses in the State of
Gujarat. The directors, therefore, consider that the memorandum of association of the company should be
altered so as to change the place of its registered office from its present situation at................................. in the
State of Maharashtra to .................................,a place situated in the State of Gujarat.
After the proposal is approved by the shareholders, a petition is required to be made, under Section 17(2) of the
Companies Act, 1956, to the Regional Director for confirmation of the alteration to the memorandum of association
of the company so as to shift the companys registered office from the State of Maharashtra to the State of
Gujarat. It is also proposed to authorize Mr. ............ Company Secretary of the company to sign and file the
petition and appear before the Regional Director in connection with the petition. An enabling clause has also
been provided authorizing the Company Secretary to appoint any other authorized representative, as he considers
necessary in connection with the petition.
The Board recommends the resolution to the members for their consideration and approval.
None of the directors of the company is concerned or interested in the proposed resolution.
ANNEXURE XI
SPECIMEN OF THE SPECIAL RESOLUTION FOR ALTERING THE
ARTICLES OF ASSOCIATION OF A COMPANY BY ADOPTION OF
NEW SET OF ARTICLES
RESOLVED THAT the regulations contained in the document submitted for consideration and approval of
this meeting, and initialled by the chairman of the meeting for the purpose of identification, be and are hereby
approved and adopted as the Articles of Association of the company in substitution for, and to the exclusion
of, the present Articles of Association of the company.
Explanatory Statement
The present Articles of Association of the company were adopted in ..... They were based on the Companies Act,
1956, as amended till that point of time. The Act has since been amended several times. Moreover certain other
Acts have affected various provisions of the Companies Act, 1956.
The directors of the company believe that it is desirable that the articles of association of the company be
revised so that they fully reflect not only the law governing the company and rules and regulations made thereunder,
but is also in conformity with modern secretarial practices and complies with the requirements of the listing
agreements of the stock exchanges on which the companys shares are listed.
Since the proposed alterations, deletions, insertions etc. to the present articles of association are numerous, it
is more convenient to adopt an altogether new set of articles of association incorporating all the proposed
alterations.
Your directors commend the proposed resolution for your consideration and adoption of the new set of Articles
of Association of the company to replace the existing Articles of Association of the company.
A copy of the existing Articles of Association is available at the registered office of the company for the inspection
of any member, if he so desire, between Monday to Friday between 2 P.M. and 5 P.M.
None of the directors is interested in the proposed resolution.
ANNEXURES XII
SPECIMEN OF SPECIAL RESOLUTION FOR ALTERATION OF ARTICLES
BY ADDITION/INSERTION OF A NEW ARTICLE
RESOLVED THAT the Articles of Association of the company be and they are hereby altered by inserting at
Lesson 2 Procedure for Alteration of Memorandum And Articles 83

the end of article ..... of the Articles of Association of the company, the following:
Notwithstanding anything contained in these articles, the managing directors and whole-time directors of the
company shall not be required to hold any such qualification shares.
Explanatory Statement
Article ............ of the companys articles of association provides that the qualification of a director shall be the
holding of equity shares in the company of the aggregate nominal value of `............ The managing directors/
whole-time directors are, pursuant to article ............ not normally liable to retire by rotation.
However, if at any time, the number of directors (including the managing/whole-time directors) as are not subject
to retirement by rotation shall exceed one-third of the total number of directors for the time being, then it is
provided by article............that such directors are liable to retire by rotation to comply with the provisions of
Section 255 of the Companies Act, 1956. As it is not contemplated that in such circumstances, the managing
directors/whole-time directors should be required to hold qualification shares, it is proposed to make it clear
beyond doubt that the managing directors/whole-time directors shall not be required to hold qualification shares.
A copy of the existing articles together with the proposed alteration is available for inspection at the registered
office of the company during the business hours on any working day.
None of the directors is concerned or interested in the proposed resolution save and except to the extent of
qualification shares required or not required by them to be held in the company.
ANNEXURES XIII
SPECIMEN OF SPECIAL RESOLUTION FOR ALTERATION OF
ARTICLES BY DELETION OF AN ARTICLE
RESOLVED THAT Articles of Association of the company be and are hereby altered by deleting article ..... of
the articles of association of the company.
RESOLVED FURTHER that after deletion, the existing Article Nos............. be renumbered as Article
Nos...................... to .................
Explanatory Statement
Article ............ of the articles of association of the company relates to the appointment of managing agents or
secretaries. Section 324A of the Companies Act, 1956 lays down that no company shall appoint managing
agents/secretaries. This article has remained in the articles of association of the company in spite of the fact that
it became redundant since then. Your directors have now thought it fit to forthwith delete this article which is no
longer in conformity with the provisions of the Companies Act, 1956.
A copy of the existing articles together with the proposed alteration is available for inspection at the registered
office of the company during the business hours on any working day.
None of the directors is concerned or interested in the proposed resolution.
ANNEXURES XIV
SPECIMEN OF SPECIAL RESOLUTION FOR ALTERATION OF ARTICLES
BY AMENDMENT OF A SPECIFIC ARTICLE
RESOLVED THAT the Articles of Association of the company be and are hereby altered by adding at the end
of Article No.13 of the Articles of Association of the company and the Companies (Issue of Share Certificates)
Rules, 1960 and the provisions of the listing agreements of the stock exchanges.
Explanatory Statement
The existing article 13 makes mention of Section 113 of the Companies Act, 1956 only. Subsequent to the
84 PP-ACL&P

enactment of the Act, the Central Government framed the Companies (Issue of Share Certificates) Rules, 1960
and the listing agreements of the stock exchanges also contain obligatory provisions regarding the issue of
share certificates by companies. Your directors have, therefore, resolved that alteration of the articles be effected
by clarifying that the issue of share certificates shall be in compliance with the companies (Issue of Share
Certificates) Rules, 1960 and the provisions of the listing agreement of the stock exchanges. Accordingly, the
proposed alteration is being placed before the company in general meeting for approval.
Existing article
13. Share certificates:
The certificate of title to shares and duplicate thereof when necessary shall be issued under the Seal of the
company, subject to the provisions of Section 113 of the Act
Proposed addition
and the Companies (Issue of Share Certificates) Rules, 1960 and the provisions of the listing agreements of
the stock exchanges.
A copy of the existing articles of association of the company together with the proposed alteration is available for
inspection of the members of the company at the companys registered office, on any working day during
business hours.
None of the directors of the company is concerned or interested in the proposed resolution.
ANNEXURES XV
BOARD RESOLUTION FOR SUBMITTING
APPLICATION FOR EXTENSION OF FINANCIAL YEAR
RESOLVED THAT an application be submitted to the Registrar of Companies seeking extension of financial
year which exceeds the period of 15 months by one week since the company was incorporated on 24 December,
2007 for the accounts to be closed on 31st March, 2009.
RESOLVED FURTHER that Company Secretary be and is hereby authorized to submit the application to the
Registrar of Companies and comply with all other requirements in this regard.

LESSON ROUND-UP
Section 13 of the Act prescribes the matters that must be stated in the memorandum of every company,
and so far as these matters are concerned, no alteration in the memorandum can be made except in
accordance with the provisions of the Act dealing with the alteration of those matters.
Alteration of any matter stated in the memorandum, other than those required to be stated by section
13 or any other provision of the Act, is made by a special resolution, unless any provision of the Act
stipulates any other method for the alteration of such matter. Such matters are treated on par with the
articles for the purposes of those provisions of the Act which refer to articles.
Section 21 of the Companies Act provides that a company may, by a special resolution and with the
approval of the Central Government signified in writing, change its name. For any change of name of
a company involving the deletion or addition, as the case may be, of the word 'Private' as a result of its
conversion from a private limited company into a public limited company or vice versa, the approval of
the Central Government should be obtained under section 21. Central Government has delegated its
powers under section 21 to the Registrars of Companies. Hence the application for approval of change
of name be made to Registrar of Companies in e-Form 1B.
Lesson 2 Procedure for Alteration of Memorandum And Articles 85

Since a company is required to pass a special resolution and obtain approval of the Central Government
for the change of its name, the change in the name of the company cannot be effected merely on the
scheme of amalgamation becoming effective. Approval to a scheme cannot be granted to give effect to
change in name. [Govind Rubber Ltd. In re, (1995) 83 Com Cases 556 (Bom): (1992) 8 CLA 149]
Section 17 deals with the alteration of a memorandum of association by any company, and the procedure
in connection therewith in respect of the alteration of two conditions contained in the memorandum: (i)
objects; and (ii) the place of the registered office when it is intended to be shifted from one State to
another.
Alteration of the memorandum with respect to both the objects and change of the registered office from
one State to another requires approval of the company by a special resolution. The alteration of the
memorandum with respect to the change of place of the registered office of the company from one
State to another, however, also requires Regional Directors confirmation.
Every company has power, by virtue of Section 31, to alter its Articles of Association. This power is
vested in the company to be exercised by it by a special resolution passed at a general meeting of its
members.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Enumerate the procedural steps required to be taken by a company to change the name of the company.
2. Explain the procedure, as provided in the Companies Act, 1956 for change of registered office of
Company from the jurisdiction of one Registrar of Companies to another Registrar of Companies
within the same State.
3. What are the different modes of altering share capital of a company? State the procedure for reduction
of share capital of a company.
4. Briefly explain the procedure for altering the article of association of a Producer company.
5. PQR Ltd. wants to change the period of its financial year. Can it do so? If yes, then state the procedure
to be followed by the company.
86 PP-ACL&P
Lesson 3 Issue of Securities 87

Lesson 3
Issue of Securities

LESSON OUTLINE
LEARNING OBJECTIVES
Meaning of Public Issue of securities
Allotment of shares is the acceptance by the
Procedure for Issue of Equity Shares company of the offer to take shares by the
applicant. That offer is accepted by the allotment
Procedure for Issue of Shares at discount either of the total number mentioned in the offer
or a less number, to be taken by the person
Procedure for Issue of Shares at premium who made the offer.

Procedure to make calls on shares For raising the capital from the public by the
issue of securities, a public company has to
Procedure for making rights issue comply with the provisions of Companies Act,
the Securities Contracts (Regulation) Act, 1956,
Procedure for issuing Bonus Shares SEBI (ICDR) Regulations, 2009, other relevant
regulations of SEBI and instructions issued by
Procedure to issue equity shares with concerned Government authorities, stock
differential voting rights exchanges, etc. Issue of Securities is
administered by Securities and Exchange Board
Procedure for issue of shares on of India in accordance with the provisions of
preferential basis/private placement Section 55A of the Companies Act, 1956.
A listed company has to comply with SEBI
Employees Stock options
regulations as well provisions of the Companies
Sweat Equity Shares Act, 1956. However an unlisted company will
have to comply with Companies Act, 1956 and
Issue and Redemption of Preference rules made thereunder. So compliance
shares requirements for listed companies are higher
as compared to unlisted companies.
LESSON ROUND UP
After going through this lesson, students will be
able to understand procedural aspects for issue
SELF TEST QUESTIONS
of securities by the company.

87
88 PP-ACL&P

1. MEANING OF PUBLIC ISSUE OF SECURITIES


An offer to subscribe to shares or debentures to the public at large or to any section of the public would be
treated as a public offer, if it is intended to invite anybody or it is made in such a way that anybody who wishes
to invest can do so.
Section 67 of the Companies Act, 1956 provides an aid for answering the question as to what amounts to public
offer or public invitation. Sub-section (1) of section 67 deals with the former and sub-section (2) with the latter.
Sub-section (3) seeks to explain what is not to be treated as public offer or public invitation, and sub-section (4)
excludes certain invitations from the purview of sub-section (2) i.e. public invitation.
The word public has been given very wide connotation by sub-section (1) by bringing in its fold any section of
the public, whether selected as members or debenture holders of the company concerned, or as clients of the
person issuing the prospectus or in any other manner. The provision contained in sub-section (1), thus, extends
the meaning of an offer to the public beyond the ordinary popular meaning of that phrase.
In all cases the determination of the question of an offer being made to the public depends upon the facts and
language of the notice in the particular circumstances of each case.
The wide scope of sub-section (1) of section 67 has been limited by sub-section (3) according to which an offer
or invitation would not deemed to have been made to public if it is regarded in all circumstances:
(i) as not being calculated to result directly or indirectly in the shares or debentures becoming available for
subscription or purchase by persons other than those receiving the offer or invitation; or
(ii) otherwise as being a domestic concern of the persons making and receiving the offer or invitation.
[Section 67(3)]
(iii) However, an offer made to fifty persons or more will be considered to have been made to the public.
[Proviso to 67(3)]
An offer by a promoter to a few of his friends, relatives and customers was held not to be offer to the public. The
test is not who receives a circular offering shares but who can accept the offer put forward. Prospectus is that
document through which capital is offered to the public and upon the basis of which the applicant has actually
subscribed.
An offer or invitation for subscription to shares or debentures by any company shall be regarded as a public offer
if it has been made to 50 or more persons. (proviso to Section 67)
The proviso cannot, however, take away an exemption which is otherwise available regardless of the number of
persons to whom the offer has been given. Accordingly, for example, even if a company offers shares on rights
basis to more than 50 persons who are its existing members, it cannot be said to be an offer not falling within the
purview of the substantive provision of sub-section (3), just because it falls within the purview of the proviso.

2. ISSUE OF EQUITY SHARES


For raising capital from the public by the issue of shares, a public company has to comply with the provisions of
the Companies Act, the Securities Contracts (Regulation) Act, 1956 including the Rules made there under and
the guidelines and instructions issued by the concerned Government authorities, the Stock Exchanges, SEBI
etc. Management of a public issue involves coordination of activities and cooperation of a number of agencies
such as managers to the issue, underwriters, brokers, registrar to the issue; solicitors/legal advisors, bankers,
printers, publicity and advertising agents, financial institutions, auditors and other Government/Statutory agencies
such as Registrar of Companies, Reserve Bank of India, SEBI etc.
The whole process of issue of shares can be divided into two parts (i) pre-issue activities and (ii) post issue
Lesson 3 Issue of Securities 89

activities. All activities beginning with the planning of capital issue till the opening of the subscription list are pre-
issue activities while all activities subsequent to the opening of the subscription list may be called post issue
activities.

Steps involved in issue of equity shares


A company proposing to raise resources by a public issue should first select the type of securities i.e. shares
and/or debentures to be issued by it. In case the company has applied for financial assistance to any of the
financial/investment institutions, the requirement of the funds to be raised from the public is to be decided in
consultation with the said institution while appraising the project of the company. The decision regarding the
issue of shares to be made at par or premium should be taken. The various steps involved in public issue of
shares are enumerated below:
1. If a listed company is offering specified securities through a public issue, it must satisfy the conditions of
Chapter II of SEBI ICDR regulations at the time of filing draft offer document with SEBI and at the time
of registering or filing the final offer document with the Registrar of Companies or Designated Stock
Exchange, as the case may be. Before making any issue of capital, it is to be ensured that the proposed
issue complies with the eligibility requirements/norms as stated in Chapter III of SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2009 and other provisions of these regulations as amended
from time to time.
2. Before going for any public issue of securities, the company must ensure that the existing partly paid-up
shares, if any, have been either fully paid up or forfeited. [SEBI ICDR Chapter II]
3. A general meeting of the shareholders (annual or extraordinary) is to be convened for obtaining their
consent to the proposed issue of shares if the articles so require. It should be also checked that the
proposed issue of equity shares should be within the authorized share capital of the company. In case
the proposed issue requires any increase in authorised share capital (Section 94), alteration in capital
clause of the Memorandum of Association (Section 16 and Section 94), alteration of the articles of
association (Section 31) etc., approvals should also be obtained at the General Meeting.
4. A copy of the Memorandum and Articles of Association of the company is to be sent to the Stock
Exchanges where the shares are to be enlisted, for approval [Section 73(1)].
5. Appoint one or more Merchant Bankers to act as managers to the public issue. The company should
enter into a memorandum of understanding with the managers to the issue and decide the fees payable
to them. If more than one Merchant Bankers are associated with the issue, the inter-se allocation of
responsibility of each of them, shall be disclosed in the offer document.
6. The company should in consultation with the Managers to the issue, decide upon the appointment of
the following other agencies (holding a valid certificate of registration, wherever compulsory):
(a) Registrars to the Issue; (b) Collecting bankers to the Issue; (c) Advisors to the Issue; (d) Underwriters
to the Issue; (e) Brokers to the Issue; (f) Printers; (g) Advertising Agents etc.
Consent of the aforesaid persons should be obtained in writing for acting in their respective capacities
for filing, with the Registrar of Companies along with the prospectus.
7. To draft a prospectus in accordance with Schedule II of the Companies Act and an abridged prospectus
as required under Section 56(3) of the Act. The prospectus should contain the disclosures as required
by Part A of Schedule VIII, subject to the provisions of Part B and C of SEBI (ICDR) Regulations, 2009
as amended from time to time.
8. The draft prospectus along with the application form for issue of shares is required to be approved by
the solicitors/legal advisors of the company to ensure that it contains all disclosures and information as
90 PP-ACL&P

required by various statutes, rules, notifications, etc. The managers to the issue should also verify and
approve the draft prospectus. The financial institutions providing loan facilities generally stipulate that
the prospectus should be got approved by them. The company should in such a case, forward a copy of
the draft prospectus for their verification and approval as well. The approval of underwriters should also
be taken if they so require.
A copy of the draft prospectus is also to be forwarded to the Registrar of Companies for its scrutiny and
approval.
9. Submit draft prospectus (draft offer document) along with the fees specified in Schedule IV of the SEBI
(ICDR) Regulations, 2009 complete in all respects alongwith the Due Diligence Certificate, inter-se
allocation of Responsibilities Certificate and a copy of Memorandum of Understanding to SEBI through
Merchant Banker at least 30 days prior to registering the prospectus with Registrar of Companies or
filing of letter of offer with Designated Stock Exchange, as the case may be.
10. The issuer shall, simultaneously while registering the prospectus with the Registrar of Companies file a
copy thereof with the SEBI through the lead merchant banker.
11. The draft offer document filed with the Board shall be made public, for comments, if any, for a period of
at least twenty one days from the date of such filing, by hosting it on the websites of the Board, recognized
stock exchanges where specified securities are proposed to be listed and merchant bankers associated
with the issue.
12. The lead merchant bankers shall, after expiry of the period stipulated in point no. 11 above, file with the
Board a statement giving information about the comments received by them or the issuer, on the draft
offer document during that period and the consequential changes, if any, to be made in the draft offer
document.
13. Check that the particulars as per audited statements contained in the prospectus are not more than six
months old from the issue opening date.
14. However, in case of a Government company, auditors report in the prospectus shall not be more than
six months from the date of filing the prospectus with the ROC or stock exchanges as the case may be.
15. The SEBI may specify changes or issue observations, if any, on the draft offer document within thirty
days from the later of the following dates:
(a) the date of receipt of the draft offer document under sub-regulation (1) of Regulation 6 of SEBI
(ICDR) Regulations, 2009; or
(b) the date of receipt of satisfactory reply from the lead merchant bankers, where the Board has
sought any clarification or additional information from them; or
(c) the date of receipt of clarification or information from any regulator or agency, where the Board has
sought any clarification or information from such regulator or agency; or
(d) the date of receipt of a copy of in-principle approval letter issued by the recognised stock exchanges
16. If the SEBI specifies changes or issues observations on the draft offer document, the issuer and lead
merchant banker shall carry out such changes in the draft offer document and comply with the
observations issued by the SEBI before registering the prospectus with the Registrar of Companies or
filing the letter of offer with the designated stock exchange.
17. Check that the two copies of final printed copy of the final offer document have been sent to dealing
offices of SEBI at least within three days of filing offer document with Registrar of Companies/Stock
Exchange as the case may be.
Lesson 3 Issue of Securities 91

18. Check that lead merchant banker has also submitted one final printed copy of the final offer document
alongwith the computer floppy containing the final prospectus/letter of offer to Primary Market Department,
SEBI, Mittal Court, A Wing, Ground Floor, Nariman Point, Mumbai.
19. Check that the public issue offer documents and other issue material has been dispatched to the various
stock exchanges, brokers, underwriters, bankers to the issue etc. in advance as agreed upon.
20. Check that 20 copies of the prospectus and application form has been dispatched in advance of the
issue opening date to various Investor Associations.
21. Check that the following details about themselves have been included by the lead merchant bankers in
all the forwarding letters of offer document filed with any Department/office of SEBI.
(i) Registration number
(ii) Date of Registration/Renewal of Registration
(iii) Date of expiry of registration
(iv) If applied for renewal, date of application
(v) Any communication from the Board prohibiting from acting as a merchant banker
(vi) Any inquiry/investigation being conducted by the Board.
22. After the concerned parties/agencies have approved the draft prospectus and the application form, the
board of directors of the company is required to approve the final draft before filing with the Registrar of
Companies. The company should, therefore, hold the meeting of the board of directors after giving
notices to directors as per section 286 to transact the following business:
(a) to approve and accept consent letters received from various parties agencies to act in their respective
capacities;
(b) to approve and accept appointment of underwriters, brokers, bankers to the issue, registrar to the
issue, solicitors and advocates to the issue, etc.
(c) to accept the Auditors Report for inclusion in the prospectus;
(d) to approve the date of opening of subscription list as also earliest and latest dates for closing of
subscription list with the authority in favour of any director for earlier closing if necessary.
(e) to approve draft prospectus/draft abridged prospectus and the draft share application form.
(f) to authorise filing of the prospectus signed by all the directors or their constituted attorneys with the
Registrar of Companies.
(g) to authorise any officer of the company, to deliver the prospectus for registration with the Registrar
of Companies and to carry out the corrections, if any, at the office of the Registrar of Companies.
(h) to approve the format of the statutory announcement.
(i) to fix the date, time, place and agenda of a general meeting to pass a necessary resolution for
public issue under section 81
23. Inform the concerned stock exchange where the shares are already listed regarding the Board meeting
at which further issue is to be considered, at least 48 hours before the meeting.
24. Issue notices in writing at least 21 days before the date of general meeting with suitable explanatory
statement.
25. Hold the general meeting and pass special resolution by three-fourth majority.
92 PP-ACL&P

26. Please note that vide clause 31(b) of the listing agreement, company should send to the stock exchange
six copies of all notices, resolutions and circulars relating to new issue of capital prior to their despatch
to the shareholders.
27. File copies of Special resolution with explanatory statement with the concerned ROC in e-form 23 within
30 days of its passing. This e-form has to be digitally signed by the managing director or director or
manager or secretary of the company. The e-Form should be pre-certified by a company secretary (in
whole-time practice) or chartered accountant (in whole-time practice) or cost accountant (in whole-time
practice) by digitally signing the e-Form.
28. In principle approval of the stock exchange has to be obtained by the company. Before filing prospectus
with the Registrar of Companies, the company should submit an application(s) to the Stock Exchange(s)
for enlistment of securities offered to the public by the said issue [Section 73(1)]. The fact that an
application(s) has/have been made to the Stock Exchange(s) must be stated in the prospectus.
29. File a copy of the prospectus with the concerned ROC for registration after having it signed by every
person named therein as director or proposed director or his agents authorized in writing on or before
the date of its publication [Section 60 (1)]. Also ensure that every prospectus filed as above states on
the face of it that a copy has been delivered for registration and also specify documents which are
require to be endorsed on or have been attached to the copies so delivered. [Section 60 (2)].
30. After receipt of the intimation from Registrar of Companies regarding registration of prospectus, the
company should take steps to issue the prospectus within 90 days of its registration with ROC [Section
60(4) of Companies Act]. For the purpose, the first step is to get adequate number of prospectuses and
application forms printed. The provisions of Section 56(3) of the Companies Act should be kept in view
in this regard which provide that no one shall issue any form of application for shares in or debenture of
a company unless the form is accompanied by a memorandum containing such salient features of a
prospectus as may be prescribed. The Ministry has prescribed Form 2A as the memorandum containing
salient features of prospectus. This means the share application form should be accompanied by Form
2A containing the abridged prospectus being attached to it along a perforated line. The then Department
of Company Affairs (Ministry of Corporate Affairs) had issued two circulars on this bearing Nos. 1/92
dated 9.1.1992 and 3/92 dated 10.4.1992 and had allowed companies to print two application forms
accompanying the abridged prospectus being attached to it along the perforated line bearing separate
printed number.
31. All listed companies whose equity shares are listed on a stock exchange and unlisted companies eligible
to make a public issue and desirous of getting its securities listed on a recognized stock exchange
pursuant to a public issue, may freely price its equity shares or any securities convertible at a later date
into equity shares to be issued to the public in consultation with the Lead Merchant Banker or through
the book building process. It should be ensured that the issue price is uniformly applicable to all investors
including promoters.
32. Underwriting means an agreement with or without conditions to subscribe to the securities of a body
corporate when the existing shareholders of such body corporate or the public do not subscribe to the
securities offered to them.
The issuers have the option to have a public issue underwritten by the underwriter.
33. The SEBI (ICDR) Regulations, 2009 require a minimum number of collection centers for an issue of
capital to be at the four metropolitan centres viz. Mumbai, Delhi, Kolkata and Chennai and at all such
centres where the stock exchanges are located in the region in which the registered office of the company
is situated. However the issuer company is free to appoint as many collection centers as it may deem fit
in addition to the above minimum requirement.
Lesson 3 Issue of Securities 93

34. Issue must be kept open for at least 3 working days and not more than 10 working days. The date of
opening and closing of the subscription list should be intimated to all the collecting and controlling
branches of the bank with whom the company has entered into an agreement for the collection of
application forms. Further, the company should ensure that a separate bank account with a Scheduled
Bank is opened for the purpose of collecting the proceeds of the issues as required by Section 73 of
the Companies Act and furnish to the controlling branches the resolution passed by the Board of
directors for opening the bank account. All moneys received from the applicants for shares should be
deposited in this account until the permission for listing is granted by the stock exchange or where an
appeal has been made against the refusal of stock exchange, until the disposal of the appeal. {Section
73 (3)}
35. Minimum subscription:
For Non-underwritten Public Issues
If the company does not receive the minimum subscription of 90% of the issued amount on the date of
closure of the issue, or if the subscription level falls below 90% after the closure of issue on account of
cheques having being returned unpaid or withdrawal of applications, the company would refund the
entire subscription amount received within 15 days of the closure of the issue. If there is a delay beyond
8 days after the company becomes liable to pay the amount, the company is required to pay interest as
per Section 73 of the Companies Act 1956.
For Underwritten Public Issues
If the company does not receive the minimum subscription of 90% of the net offer to public including
devolvement of Underwriters within 60 days from the date of closure of the issue, the company would
refund the entire subscription amount received within 70 days of the closure of the issue. If there is a
delay beyond 8 days after the company becomes liable to pay the amount, the company is required to
pay interest prescribed under Section 73 of the Companies Act 1956.
Please note that if the company fails to receive minimum subscription within the prescribed period it
cannot proceed with the allotment of shares. (Section 69)
36. A Board resolution should be passed for allotment of shares and authorising the issue of letter of allotment/
share certificates.
37. A return of allotment in e-Form No. 2 of the Companies (Central Governments) General Rules and
Forms, 1956 should be filed with the Registrar of Companies within 30 days of the date of allotment
along with the fees as prescribed in Schedule X of the Act. Details of shares allotted payable in cash,
details of shares allotted payable for a consideration other than cash, capital structure of the company
after taking into consideration allotment of shares has to be stated in this e- form. Please note that for
filings done on or after 1st May, 2011, the e-Form shall be taken on record through electronic mode
without any processing at the Registrar of Companies office. Ensure that all particulars in the e-Form
are correct. This e-form has to be digitally signed by the managing director or director or manager or
secretary of the company. There is no provision for resubmission of this e-Form. Following documents
have to be attached with this form:-
(i) A List of allottees (separate list for each allotment) (mandatory attachment). In case the complete
list is not attached, you need to submit the same in a CD separately with the office of concerned
Registrar of Companies (ROC);
(ii) Copy of boards resolution approving the allotment of shares;
(iii) In case of allotment of shares for consideration otherwise than in cash and in case the agreement
or contract is executed in writing, attach copy of such contract or agreement;
94 PP-ACL&P

(iv) Copy of the valuation report of properties/rights and shares.


The e-Form should be pre-certified by a company secretary (in whole-time practice) or chartered
accountant (in whole-time practice) or cost accountant (in whole-time practice) by digitally signing the e-
Form.
38. (i) Along with e-Form No. 2, e-Form No. 3 showing particulars of contracts relating to shares has also to
be filed, where a company allots shares as fully paid or partly paid for consideration other than cash
without entering into any written agreement.
(ii) E-Form No. 4 containing the statement of the amount or rate percentage of the commission payable
on shares and number of shares for which persons have agreed for a commission to subscribe absolutely
or conditionally together with a copy of the contract for payment of commission, resolution of the board
of directors authorising such payment and consent of all the directors of the company should be filed
with the Registrar.
39. Allotment letters/refund orders should be sent to the successful/unsuccessful applicants. The refund
orders for an amount exceeding ` 1,500 should be sent to the applicants by registered post only, whereas
those below ` 1,500 can be sent Under Certificate of Posting (Deptt.s Circular 1/93 dated 16.3.1993).
In view of dematerialization of shares, the refunds may also be effected through funds transfer to the
respective accounts of the applicants.
40. As per Section 113, the company should deliver the share certificates within 3 months after the allotment
of shares. In case the shares are dealt within a depository, the company shall intimate the details of
allotment of shares to depository immediately on allotment of such shares. In such cases, no share
certificates need to be issued.
41. Particulars of allotment should be duly entered in the Register of members and other records.

Point need to Know


Prior approval of RBI under FEMA, 1999 has to be obtained in case of issue of any shares to Foreign
Institutional Investors/NRIs/Overseas Corporate Bodies unless they fall in the automatic route.

3. ISSUE OF SHARES AT DISCOUNT


When a company issues a share at a price lower than its nominal or par value, the shares are said to have been
issued at a discount. According to sub-section (1) of section 79, if any company proposes to issue any shares at
a discount, it can do so only if the conditions stipulated in this section are fulfilled. The said conditions are as
follows:
1. The shares to be issued are of a class which has already been issued by the company. Therefore, the
first issue of shares of a company cannot be at a discount.
2. The issue is authorised by an ordinary resolution passed by the company at a general meeting.
3. The Company Law Board has sanctioned the issue.
4. The ordinary resolution specifies the maximum rate of a discount at which the shares are to be issued.
[Company Law Board shall not sanction a discount of more than ten per cent unless it is of the opinion
that a higher percentage of a discount is justified in the special circumstances of the case].
5. The issue is made after one year from the date on which the company became entitled to commence
business. [In the case of a private company, the date of incorporation of the company will be taken as
the date of commencement of business].
Lesson 3 Issue of Securities 95

6. The shares are issued within two months of the sanction by Company Law Board or within such extended
time as it may allow.

Procedure for Issue of Shares at Discount


1. Verify the following points before taking the decision of issuing shares at a discount:
(i) Not less than one year has elapsed since the date the company was entitled to commence business.
[Section 79(2)(iii)];
(ii) Shares to be issued at a discount are of a class already issued. [Section 79(2)]
2. Hold a Board Meeting after giving notice to all the directors of the company as per Section 286 to decide the
number of shares to be issued at a discount, the rate of discount and to fix up the date, time, place and agenda
of the General Meeting, to pass an ordinary resolution subject to the sanction of the Company Law Board (see
note below). (for specimen of the board resolution, see Annexure I)
3. Within 15 minutes of the closure of the Board Meeting, intimate the Stock Exchange at which the securities of
the Company are listed by letter or fax or by telegram, short particulars of issue of shares at discount. (Clause 22
(c) of the Listing Agreement)
4. Forward promptly to the Stock Exchange six copies of all notices, resolutions and circulars relating to new
issue of capital prior to their despatch to the shareholders.
5. Issue notices in writing at least twenty-one days before the date of the General Meeting proposing the Ordinary
Resolution subject to the sanction of the Company Law Board along with suitable Explanatory Statement. [Section
171(1) read with section 173(2)].
6. Hold the General Meeting and pass the Ordinary Resolution giving authority to issue shares at a discount by
simple majority. (for specimen of the resolution, see Annexure II)
7. Ensure that the resolution specifies the maximum rate of discount at which shares are to be issued.
8. If the company is listed, forward promptly to the Stock Exchange three copies of the notice and a copy of the
proceedings of the General Meeting. (Clause 31 (c) & 31 (d) of the Listing Agreement)
9. Make an application pursuant to Section 79 to the concerned Bench of the Company Law Board in the form
of a petition in Form No. 1 in Annexure II to the Company Law Board Regulations, 1991 together with the
documents specified.
10. Ensure that a fee of ` 1,000/- is paid on the petition in accordance with the Company Law Board (Fees on
Applications and Petitions) Rules, 1991 by way of demand draft favouring Pay and Accounts Officer, Ministry of
Corporate Affairs, New Delhi or Mumbai or Kolkata or Chennai depending on the Regional Bench of the
Company Law Board where the aforesaid petition is to be filed.
11. Send the petition along with the following documents:
(i) Certified true copy of the Memorandum and Articles of Association of your company;
(ii) Certified true copy of the notice calling for the General Meeting with Explanatory Statement of the
resolution sanctioning issue;
(iii) Certified true copy of the minutes of the meeting at which the resolution was passed;
(iv) Certified true copy of the last three years audited balance sheets, profit and loss accounts, auditors
report and directors report;
(v) Affidavit verifying the petition;
(vi) Demand draft or bankers cheque evidencing payment of fee of ` 1,000/-;

Note : Power of CLB has been transferred to Central Government by Companies (Second Amendment) Act, 2002. However, the same has
not been brought into force. Till that date the existing procedure is to be allowed.
96 PP-ACL&P

(vii) Memorandum of appearance (in Form No. 5 of Annexure I to the Regulations) with copy of the Board
Resolution or the executed Vakalatnama, as the case may be.
12. Ensure that the aforesaid affidavit is prepared on non- judicial stamp paper of the requisite value and after
obtaining the signature of the Deponent thereon, have the said affidavit either notarised by the Notary Public
with notarial stamps affixed on it or have it sworn before the Oath Commissioner.
13. Affix court fee stamps of the requisite value on the petition before filing.
14. On receipt of the copy of the order of the Company Law Board, give notice of the order to the ROC in e-Form
No. 21 along with a certified copy of the order to the ROC for registration within one month from the date of the
order after payment of requisite filing fee in cash or demand draft as per Schedule X.
15. Ensure that the said e-form is digitally signed by the managing director or director or manager or secretary
of the company duly authorized by the Board of directors.
16. Keep in mind that time taken by the Company Law Board in supplying a copy of the order will be excluded in
computing the period of one month. [Section 640A].
16. If a Prospectus is to be issued, then issue it on receipt of the Company Law Boards order.
17. Ensure that the Prospectus contains particulars of the discount allowed on the issue of shares or of so much
of that discount as has not been written off at the date of the issue of the Prospectus.
18. If a Prospectus is issued, then deliver a copy of it to the ROC for registration. [Section 60]. If no Prospectus
is issued, then deliver a Statement in lieu of Prospectus at least three days before the allotment of shares.
[Section 70(1)].
19. If the company wants to have these shares to be quoted on a recognised Stock Exchange, then make an
application for listing to the Stock Exchange.
20. File electronically with the ROC, a return in e-Form No. 2 within thirty days of allotment of shares issued at
a discount. Details of shares allotted payable in cash, details of shares allotted payable for a consideration other
than cash, capital structure of the company after taking into consideration allotment of shares has to be stated in
this e- form. Please note that for filings done on or after 1st May, 2011, the e-Form shall be taken on record
through electronic mode without any processing at the office of the Registrar of Companies. Ensure that all
particulars in the e-Form are correct. This e-form has to be digitally signed by the managing director or director
or manager or secretary of the company duly authorized by the Board of directors. There is no provision for
resubmission of this e-Form. Following documents have to be attached with this form:
(i) a certified true copy of the resolution of the General Meeting authorizing such issue;
(ii) a certified true copy of the order of the Company Law Board sanctioning the issue; and
(iii) where the maximum rate of discount exceeds ten per cent, a copy of the order of the Company Law
Board permitting the issue at the higher percentage.
(iv) a list of allottees (separate list for each allotment) (mandatory attachment). In case the complete list is
not attached, you need to submit the same in a CD separately with the office of concerned Registrar of
Companies (ROC).
The e-Form should be pre-certified by a company secretary (in whole-time practice) or chartered accountant (in
whole-time practice) or cost accountant (in whole-time practice) by digitally signing the e-Form and filed with the
applicable filing fees paid electronically.
21. Ensure that every prospectus if issued relating to the issue of shares at a discount contains particulars of the
discount allowed on the issue of the shares or of so much of that discount as has not been written off at the date
of the issue of the prospectus. [Section 79(4)].
Lesson 3 Issue of Securities 97

22. Formalities regarding issue of share certificates should be complied with. Particulars of allotment should be
duly entered in the Register of members and other records.

Point need to Know


In case of allotment of shares to mutual funds, financial institutions,etc, the respective agreements
should be signed and dated.

4. ISSUE OF SHARES AT A PREMIUM


The word premium implies something more than normal. With reference to shares and securities issued by a
company, premium means a sum over and above the face or par value of a security. It is the amount which is
excess of the issue price of a share over its face value (or par value) and is referred to as share premium. When
shares are issued by a company at a price above their face value (or nominal or par value) then the shares are
said to have been issued at a premium. It is the difference between the price at which a company issues a
share and the face value of a share.
In accordance with sub-section (1) of section 78, where a company issues shares at a premium, whether for
cash or otherwise, a sum equal to the aggregate amount or value of the premium on those shares shall be
transferred to an account, to be called, the share premium account. This section specifies the items where the
amount received as share premium on issue of shares may be applied.
If the company is a listed company then the company must follow the provisions of SEBI (ICDR) Regulations,
2009.

Procedure for Issue of Shares at Premium


1. Ensure that the issue is within the authorized share capital of the company; otherwise to increase the same by
following the procedure as prescribed in the Act.
2. Please note that as per Regulation 26 (1) of SEBI (ICDR) Regulations, 2009 the following companies only can
issue shares (make initial public offer) to the public at a premium if:
(a) it has net tangible assets of at least three crore rupees in each of the preceding three full years (of
twelve months each), of which not more than fifty per cent. are held in monetary assets:
If more than fifty per cent of the net tangible assets are held in monetary assets, the issuer has made
firm commitments to utilise such excess monetary assets in its business or project;
The limit of fifty per cent on monetary assets shall not be applicable in case the public offer is made
entirely through an offer for sale.
(b) it has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a restated and
consolidated basis, during the three most profitable years out of the immediately preceding five years.
(c) it has a net worth of at least one crore rupees in each of the preceding three full years (of twelve months
each);
(d) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of
issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the
preceding financial year;
(e) if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding
one full year has been earned by it from the activity indicated by the new name.
As per regulation 26(2)(a), an issuer not satisfying the conditions stipulated above may make an initial public
offer if the issue is made through the book-building process and the company undertakes to allot, at least:
98 PP-ACL&P

(i) fifty percent of the net offer to public to qualified institutional buyers and refund full subscription monies
if it fails to make allotment to qualified institutional buyers; or
(ii) fifteen percent of the cost of the project is contributed by scheduled commercial banks or public financial
institutions, of which not less than ten percent shall come from the appraisers and the issuer undertakes
to allot at least ten percent of the net offer to public to qualified institutional buyers and to refund full
subscription monies if it fails to make the allotment to the qualified institutional buyers;
Further, as per regulation 27, an issuer may make a further public offer if it satisfies the conditions specified in
clauses (d) and (e) of sub-regulation (1) of regulation 26 and if it does not satisfy those conditions, it may make
a further public offer if it satisfies the conditions specified in sub-regulation (2) of regulation 26.
3. Check up whether the company falls under any of the categories mentioned above.
4. Note that the company is allowed to mention a price band of 20% (that is the ceiling or cap price should not be
more than 20% of the (floor price) in the draft offer document required to be submitted to SEBI.
5. Include suitable explanatory notes indicating the financial implications if the price were to be fixed at different
levels within the price band approved by the Board of Directors or General Body of Shareholders.
6. Remember that if the Board of Directors have been authorised to determine the offer price within a specified
price band, such price should be determined by a board resolution, for which 48 hours prior notice has to be
given to the Stock Exchange.
7. Determine the actual price at the time of filing the final offer document with ROC/Stock Exchange, ensuring
that such actual price is within the price band.
8. Ensure that the final offer document indicates only one price (that is the actual price determined as per 6
above) and one set of financial projections.
9. Determine the premium in consultation with the Lead Merchant Banker to the public/rights issue.
10. Mention in the offer document that the company and the Lead Merchant Banker with whose consultation the
premium was decided, are of the opinion that the premium is justified.
11. In the offer document provide complete explanation and parameters for fixation of the premium amount, and
disclose precisely how the amount of premium has been arrived at.
12. Ensure the basic financial information and the basis of arriving at the premium amount are clearly spelt out,
and avoid giving vague statements relating to promoters background, industrys future prospects, etc.
13. Give justification of the price fixed with reference to the past performance and future projections. Furnish
details to show as to how companys current and projected performance compares favourably with the financial
parameters of the relevant industry as a whole.
14. Mention in the offer documents specifically whether the future projections are based on own estimates or on
an independent appraisal made by financial institutions, banks, etc.
15. Disclose the market prices immediately before the issue to enable the investors to ascertain whether prices
are fair or rigged market prices.
16. Indicate for the above purpose the net asset value and High, Low and Average market prices of shares
for the last three years, and also monthly High and Low prices for the last 6 months prior to the date of filing of
the offer document with ROC/concerned Stock Exchange.
17. Also disclose volume of trading in the shares on the day(s) when the High and Low prices were recorded
during the aforesaid period of 6 months. In some of the abridged prospectus volume of trading is disclosed
under the following heads:
Lesson 3 Issue of Securities 99

Settlement ending (Dates) No. of Deals No. of Shares Value (` Lakhs)

18. Also state that the company is eligible to make an issue at premium as per the Guidelines and that the
premium has been decided in consultation with the Lead Merchant Banker of the issue who are of the opinion
that the premium is justified and reasonable.
19. Indicate the financial performance of the company for the last five years as also the projections as appraised
by the lead financial institutions for the next three/five years under the above heads. [For a new company, the
parameters can be suitably modified indicating projections for the next three/five years.].
20. Hold a Board Meeting after issuing notices to all the directors of the company as per section 286 and pass
a resolution approving the proposal for issue of securities at a premium, specifying the number and nominal
value of shares, amount of premium on shares, whether such premium will be paid in cash or otherwise and
the terms and conditions for issue of the shares and to approve the draft notice fixing the date, time, venue
and agenda for the general meeting to pass the special resolution. (for specimen of the board resolution, see
Annexure III)
21. Inform about the decision for issue of securities at premium to the stock exchange immediately after the
Board meeting.
22. Send the notice of the general meeting along with the explanatory statement to the members entitled to
receive the notice of the meeting and the auditors of the company. Also, forward 3 (three) copies of the Notice
along with the explanatory statement to each of the Stock exchanges on which the shares of the company are
listed.
23. Hold the General meeting and pass the special resolution with three-fourth majority for the issue of shares at
a premium.
24. Forward the proceedings of the general meeting to each of the Stock exchanges on which the shares of the
company are listed.
25. File the special resolution electronically within 30 days from the date of the general meeting along with e-
Form No. 23 of the Companies (Central Governments) General Rules and Forms, 1956 with the Registrar of
Companies along with the filing fees.
26. Proceed to allot the shares so issued at a premium at a duly convened Board meeting. Allotment of shares
to NRIs/non-residents should be made only after the receipt of RBI approval.
27. In case of a listed company, give intimation to the Stock Exchange(s) of the allotment as approved by the
Board.
28. The premium so received should be transferred to the Securities Premium Account.
29. File e-Form No. 2 of the Companies (Central Governments) General Rules and Forms, 1956 with the
Registrar of Companies along with the filing fee.
30. Issue share certificates in accordance with the Issue of Share Certificate Rules, 1960. In case the shares are
dealt within a depository, the company shall intimate the details of allotment of shares to depository immediately
on allotment of such shares. In such cases, no share certificates need to be issued.
31. Make necessary entries with regard to particulars of allotment in the Register of Members of the Company.
32. Complete the necessary formalities and arrangements for listing of the securities on the Stock Exchange(s).

5. MAKING CALLS ON SHARES


As per section 292(1)(a) the power to make calls can be exercised only by the Board by means of a resolution
100 PP-ACL&P

passed at a duly convened Board meeting. The power cannot be delegated to Committee of directors. . A call
may be revoked or postponed at the discretion of the Board. [Regulation 13]. This power of making a call vested
in the directors is a fiduciary power to be exercised for the benefit of the company.
A call must be made in accordance with the provisions contained in the companys articles. Where the articles
require that the resolution of the directors should indicate the time, amount, place and person to whom the
amount of the call should be paid, every requirement should be strictly complied with.

Procedure to Make Calls on Shares


1. Convene a Board Meeting after giving notice to all the directors of the company as per Section 286 and pass
a resolution calling whole or any portion of the unpaid amount on the shares of the company stating, inter-alia,
the time, the place, the amount of call and the last date of making the payment. (for specimen of the board
resolution, see Annexure IV)
2. The call should be uniform on the same class of shares on which the same amounts have been paid. [Section
91]
3. Comply with any condition imposed in the Articles of Association of the company in this regard.
4. If the companys Articles of Association provide as in Table A to Schedule I to the Companies Act, 1956, then
no call should exceed one-fourth of the nominal value of the share or payable at less than one month from the
date fixed for the payment of the last preceding call (applicable to subsequent calls).
5. Issue call letters and send necessary reminders until the call is fully paid or the shares are forfeited.
6. Make necessary entries in various registers on the share certificates.
7. If any amount is paid in advance of calls on any shares, then stipulate that such amount may carry interest but
shall not in respect thereof confer a right to dividend or to participate in profits.
8. If the shares of the company are listed on a recognised Stock Exchange, then:
(i) approval of the call notice by the Stock Exchange is required;
(ii) Intimate about the decision of the meeting within 15 minutes of the closure of the said meeting to the
Stock Exchange;
(iii) Forward promptly to the said Stock Exchange three copies of the call letters.
(iv) Ensure that the calls are structured in such a manner that the entire subscription money is called within
12 months from the date of allotment.
9. Take note of Regulations 13 to 18 of Table A of Schedule I to the Act also.
10. Particulars in respect of amount called up and unpaid call must be disclosed in the Balance Sheet as
required by Schedule VI.

6. RIGHTS ISSUE
Shares offered to the existing shareholders of a company are called rights shares. Section 81 of the Companies
Act contains provisions on further issue of capital, and enacts the principle of pre-emptive rights of shareholders
of a company to subscribe to new shares of the company.
In the rights shares, the shareholders of a company have a pre-emptive right to subscribe to these shares.
Where a company proposes to increase the subscribed capital of a company by issuing further shares, the
shares are offered for subscription to the existing shareholders of the company in a certain proportion. This is a
privilege given to shareholders of a company to subscribe pro rata to a new issue of securities. It is a statutory
Lesson 3 Issue of Securities 101

right of shareholders to have offered the new shares, and to subscribe to them. The shareholders, who receive
offers for subscribing to the rights shares, are also entitled to renounce this right.
Articles of association usually contain regulations on rights issue. If there are no such regulations, the Articles of
Association has to be amended as per the provisions of section 31 of the Companies Act, 1956.
Provisions of Section 81 are mandatory for all public companies, listed as well as unlisted, but optional for
private companies. In case, a private company wants to have such provision, articles of association of the
company must specifically provide for it.
This section does apply to the issue of preference shares, but it does not apply to the issue of debentures or
bonds.
For issue of shares on rights basis under section 81, following conditions must be fulfilled:
(1) A period of two years from the incorporation of the company or one year from the date of first allotment,
whichever is earlier has expired at the time of the rights issue;
(2) The rights shares are offered to the members in proportions, as nearly as circumstances admit, to the
capital paid-up on those shares at that date, i.e. pro rata;
(3) The shares are offered by a letter of offer specifying the number of shares offered and other information;
(4) At least 15 days period is given to the members to enable the shareholders to subscribe to those
shares;
(5) Unless the articles of association of the company specifically provides for not giving the members the
right of renunciation, the offer of rights shares provides them with that right.
An eligible company shall be free to make public or rights issue of equity shares in any denomination determined
by it in accordance with Sub-section (4) of Section 13 of the Companies Act, 1956 and in compliance with the
following and other norms as may be specified by SEBI from time to time.
In case of rights issue, the promoters shall disclose their existing shareholding and the extent to which they are
participating in the proposed issue, in the offer document.
As per SEBI (ICDR) Regulations, 2009 no listed issuer company will make a rights issue where the aggregate
value of specified securities, including premium, is ` 50 lakhs or more unless the draft offer document is filed
with SEBI along with the fee specified in schedule IV thereto through Merchant Banker atleast 30 days prior to
registering prospectus, red herring prospectus or shelf prospectus with the ROC or filing of letter of offer with
Designated Stock Exchange, as the case may be. Also if a listed company is offering specified securities through
a rights issue then it must satisfy the conditions of Chapter II of SEBI ICDR regulations at the time of filing draft
offer document with SEBI and at the time of registering or filing the final offer document with the Registrar of
Companies or designated stock exchange, as the case may be. Further it shall also comply with the provisions
of chapter IV of these regulations.
In a rights issue, the abridged letter of offer should be dispatched to all shareholders atleast one week before the
date of opening of issue except where a specific request for letter of offer is received from any shareholder.
The minimum subscription in case of rights issue should be ensured as under:

For Non-underwritten Rights Issue


(i) If the Company does not receive the minimum subscription of 90% of the issue, the entire subscription
shall be refunded to the applicants within fifteen days from the date of closure of the issue.
(ii) If there is delay in the refund of subscription by more than 8 days after the company becomes liable to
pay the subscription amount (i.e. fifteen days after closure of the issue), the company will pay interest
102 PP-ACL&P

for the delayed period, at rates prescribed under sub-sections (2) and (2A) of Section 73 of the Companies
Act, 1956.

For Underwritten Rights Issue


(i) If the Company does not receive minimum subscription of 90% of the issue including devolvement of
underwriters, the entire subscription shall be refunded to the applicants within fifteen days from the date
of closure of the issue.
(ii) If there is delay in the refund of subscription by more than 8 days after the company becomes liable to
pay the subscription amount (i.e., fifteen days) after closure of the issue, the company will pay interest
for the delayed period, at prescribed rates in sub-sections (2) and (2A) of Section 73 of the Companies
Act, 1956.

Steps involved in issue of Rights Shares


The various steps involved for issue of rights share are enumerated below:
1. Check whether the rights issue is within the authorised share capital of the company. If not, steps should be
taken to increase the authorised share capital of the Company.
No company shall make any further issue of capital during the period commencing from the submission of offer
document to the Board on behalf of the company for rights issues, till the securities referred to in the said offer
document have been listed or application moneys refunded on account of non-listing or under subscription etc.
unless full disclosures regarding the total capital to be raised from such further issues are made in the draft offer
document.
The issuer company may utilise funds collected against rights issues after satisfying designated stock exchange
that minimum 90% subscription has been received.
2. In case of a listed company, notify the stock exchange concerned the date of Board Meeting at which the
rights issue is proposed to be considered at least 2 days in advance of the meeting. A listed company can make
a right issue in accordance with SEBI (ICDR) regulations 2009.
A company cannot make a right issue unless:
(a) it enters into an agreement with depository for dematerialization of securities already issued or proposed
to be issued to the existing shareholders; and
(b) the company gives an option to the subscribers/shareholders to receive the certificate or hold securities
in dematerialized form with a depository.
3. Rights issue shall be kept open for subscription at least 15 days and not more than 30 days.
A listed issuer making a rights issue shall announce a record date for the purpose of determining the shareholders
eligible to apply for specified securities in the proposed rights issue.
The abridged letter of offer, along with application form, shall be dispatched through registered post or speed
post to all the existing shareholders at least three days before the date of opening of the issue:
The letter of offer shall be given by the issuer or lead merchant banker to any existing shareholder who has
made a request in this regard.
In case of a composite issue the gap between closure dates of right issue and public issue should not exceed 30
days.
Ensure that before going for any rights issue of securities, existing partly paid-up shares, if any, have been either
fully paid up or forfeited. [SEBI ICDR Chapter II]
Lesson 3 Issue of Securities 103

4. Convene the Board meeting and pass the resolution for proposal for rights issue. (for specimen of the board
resolution, see Annexure V)
5. The Board should decide on the following matters:
(i) Quantum of issue and the proportion of rights shares and premium, if any, thereon in consultation with
the lead merchant banker.
(ii) Alteration of share capital, if necessary, and offering shares to persons other than existing holders of
shares in terms of Section 81(1A).
(iii) Fixation of record date.
(iv) Appointment of merchant bankers and underwriters (if necessary).
(v) Approval of draft letter of offer or authorisation of managing director/ company secretary to finalise the
letter of offer in consultation with the managers to the issue, the stock exchange and SEBI.
(vi) To approve a draft application forms (for subscribing to the rights shares, additional shares, splitting the
rights renunciation)
(vii) To authorise Company Secretary or other officer to send the Letter of Offer to the member and to do
such acts, deeds and things as may be necessary to give effect to the Boards decision
(viii) To convene a general meeting for passing necessary resolutions, if any; to fix date, time and place of
the general meeting and to authorise the Company Secretary or other officer to issue notice of the
meeting
6. Immediately after the Board Meeting, notify the concerned Stock Exchanges about particulars of Boards
decision within 15 minutes of the closure of board meeting.
7. If it is proposed to offer shares to persons other than the shareholders of the company, a General Meeting has
to be convened and a resolution is to be passed for the purpose in terms of Section 81(1A) of the Companies
Act. Also if the right shares are to be issued to the members registered on a particular date, then ensure that the
resolution should be a special resolution as under section 81, as the words holders of equity shares have been
used to mean not only registered equity shareholders of the company but all the holders of equity shares of
company, whether registered or not.
8. Forward 6 sets of letter of offer and composite application forms to the concerned Stock Exchange(s) prior to
its dispatch to the shareholders. Also close companys transfer books and give stock exchange a notice in
advance of at least 7 working days stating the date of closure of transfer books.
9. Check that an advertisement giving date of completion of despatch of letter of offer has been released in at
least an English National Daily, one Hindi National Paper and a Regional Language Daily where registered
office of the issuer company is situated.
10. Check that the advertisement contains the list of centres where shareholders or persons entitled to rights
may obtain duplicate copies of composite application forms in case they do not receive original application form
alongwith the prescribed format on which application may be made.
11. Open an account with the designated bankers to the issue for acceptance of applications in accordance with
the SEBI Regulations and in consultation with the Regional Stock Exchange.
12. Deposit with the Regional Stock Exchange an amount equal to 1% of the total issue amount as per Clause
42 of the Listing Agreement. Alternatively, 50% of the requisite amount may be deposited in cash and the
balance 50% by way of a bank guarantee.
13. After the last date for making the application, collect the application forms received and scrutinise them in all
respects. Sort the valid applications and defective applications.
104 PP-ACL&P

14. Convene a meeting of the Board/Allotment Committee and pass a resolution for allotment and file Return of
Allotment with the Registrar of Companies in e-form no. 2 (Section 75 of the Companies Act) after paying the
required fee as per Schedule X of the Act. Attach with this e-form list of allottees and a certified copy of the
general meeting resolution.
15. Issue Letters of Right along with composite application form within six weeks of the record date or date of
reopening of the Transfer Books after their closure for the purpose of making a rights issue and to issue Allotment
Letters or certificates within six weeks of the last date fixed by the Company for submission of letters of
Renunciation or applications of new securities [clause 23 (f) of listing agreement]. Alternatively, prepare and
despatch Share Certificates to the allottees. In any case, Share Certificates should be despatched within 3
months from the date of allotment.
16. Simultaneously, prepare and despatch regret letters and refund orders to the applicants to whom no shares
have been allotted. Clause 45 of the Listing Agreement provides that, if allotment of securities offered in a rights
issue is not made within 30 days of the closure of the rights issue, the company should pay interest at the rate
of 15% from the 31st day if the application money is not refunded within 30 days.
No company shall make any further issue of capital during the period commencing from the submission of offer
document to the Board on behalf of the company for rights issues, till the securities referred to in the said offer
document have been listed or application moneys refunded on account of non-listing or under subscription etc.
unless full disclosures regarding the total capital to be raised from such further issues are made in the draft offer
document.
The issuer company may utilise funds collected against rights issues after satisfying designated stock exchange
that minimum 90% subscription has been received.
17. Immediately after the allotment, enter the particulars of the allottees in the Register of Members.
18. Make applications to all the Stock Exchanges where the companys shares are listed, for their permission for
the listing of the rights shares allotted.
19. The Lead Merchant Banker shall submit post issue reports to the bank as per Regulation 65.

Points need to know


1. If a company has completed a buy-back of its shares and other specified securities under section 77A,
it cannot make further issue of the same kind of shares including allotment of further shares under clause
(a) of sub-section (1) of section 81 or other specified securities within a period of six months except by way
of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity or conversion of preference shares or debentures into equity shares. [Section
77A(8)]
2. As per SEBI (ICDR), 2009, no issuer shall make a public issue or rights issue of specified securities:
(a) if the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are
debarred from accessing the capital market by the Board;
(b) if any of the promoters, directors or persons in control of the issuer was or also is a promoter, director
or person in control of any other company which is debarred from accessing the capital market under
any order or directions made by the Board;
(c) if the issuer of convertible debt instruments is in the list of willful defaulters published by the Reserve
Bank of India or it is in default of payment of interest or repayment of principal amount in respect of
debt instruments issued by it to the public, if any, for a period of more than six months;
Lesson 3 Issue of Securities 105

(d) unless it has made an application to one or more recognised stock exchanges for listing of specified
securities on such stock exchanges and has chosen one of them as the designated stock exchange:
Provided that in case of an initial public offer, the issuer shall make an application for listing of the
specified securities in at least one recognised stock exchange having nationwide trading terminals;
(e) unless it has entered into an agreement with a depository for dematerialisation of specified securities
already issued or proposed to be issued;
(f) unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited;
(g) unless firm arrangements of finance through verifiable means towards seventy five per cent. of the
stated means of finance, excluding the amount to be raised through the proposed public issue or
rights issue or through existing identifiable internal accruals, have been made.

7. ISSUE OF BONUS SHARES


No dividend can be paid by a company except in cash. However, the prohibition against payment of dividend
otherwise than in cash, is not deemed to prohibit the capitalization of profits or reserves. [Section 205(3)]. The
declaration of bonus issue in lieu of dividend is not permitted. There is, however, no prohibition against reducing
the amount of dividend as against previous year.
If there are any partly paid-up shares, these shares should be made fully paid-up before the bonus issue is
made.
A company in paying up unissued shares to be issued as fully paid bonus shares may apply securities premium
account. [Section 78(2)(a)].
Capital redemption reserve amount may be applied in paying up unissued shares of the company to be issued
as fully paid bonus shares [Section 80(5)]. The bonus issue is to be made out of free reserves built out of the
genuine profits or securities premium collected in cash only. When a company has accumulated free reserves
and is desirous of bridging the gap between the capital and fixed assets, it may issue bonus shares to its
shareholders. Such an issue would not place any fresh funds in the hands of the company.
Regulations 96 and 97 of Table A authorize a company to capitalize its profits and reserves and issue bonus
shares.
The company which has made default in payment of interest or principal in respect of fixed deposits and interest
on existing debentures or principal on redemption thereof, and has sufficient reason to believe that it has defaulted
in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity,
bonus, etc, cannot make a bonus issue.
A company which announces bonus issue after the approval of board of directors and does not require
shareholders approval for capitalisation of profits or reserves for making bonus issue as per the Articles of
Association, shall implement bonus issue within fifteen days from the date of approval of the issue by the board
of directors of the company and shall not have the option of changing the decision
However, where the company is required to seek shareholders approval for capitalisation of profits or reserves
for making bonus issue as per the Articles of Association, the bonus issue shall be implemented within two
months from the date of the meeting of the board of directors wherein the decision to announce bonus was
taken subject to shareholders approval.
The articles of association should have provision for capitalization of reserves, etc, and if not, the company
shall pass a resolution at its General Body Meeting making provisions in the Articles of Association for
capitalization.
106 PP-ACL&P

There are no guidelines on issuing bonus shares by private or unlisted companies. However, SEBI has issued
guidelines for Bonus Issue which are contained in Chapter IX of SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 with regard to bonus issues by listed companies. A certificate duly signed by
the issuer company and counter signed by statutory auditor or by Company Secretary in practice to the effect
that all the provisions have been complied with shall be forwarded to the SEBI.
The following conditions must be satisfied before issuing bonus shares:
(a) There must be a provision for issue of bonus shares in the articles of the company. Such a provision is
generally there in articles of almost all the companies as they adopt Table A of Schedule I of the Act
(Regulation 96). In case of absence of such an article in the Articles of Association of the company, then
the same has to be altered by a special resolution to enable the company to issue bonus shares.
(b) Bonus Issue must be sanctioned by shareholders in general meeting on recommendation of the Board
of directors of the company.
(c) SEBI Guidelines in this regard must be complied with.
(d) Authorised Capital must be increased, wherever required.

Steps involved in Issue of Bonus Shares


A company issuing bonus shares should ensure that the issue is in conformity with the guidelines for bonus
issue laid down under Chapter IX of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
The procedure for issue of bonus shares by a listed company is enumerated below:
1. Ensure that bonus issue has been made out of free reserves built out of the genuine profits or securities
premium collected in cash only.
2. Ensure that reserves created by revaluation of fixed assets are not capitalised.
3. Ensure that the company has not defaulted in payment of interest or principal in respect of fixed deposits
and or debt securities issued by it or in respect of the payment of statutory dues of the employees such
as contribution to provident fund, gratuity, bonus etc.
4. Ensure that the bonus issue is not made in lieu of dividend.
5. There should be a provision in the articles of association of the company permitting issue of bonus
shares; if not, steps should be taken to alter the articles suitably.
6. The share capital as increased by the proposed bonus issue should be well within the authorised capital
of the company; if not, necessary steps have to be taken to increase the authorised capital.
7. Fix the date for the Board Meeting for considering the following matters:
To approve the bonus issue;
To approve the resolution to be passed at a general meeting;
To approve requisite resolution for increase of the capital and consequential alteration of the
memorandum and the articles (if necessary)
To decide (or authorise managing director/secretary or some other officer of the company to decide)
the dates for fixing a record date.
(for specimen of the board resolution, see Annexure VI)
8. If there are any partly paid-up shares, ensure that these are made fully paid-up before the bonus issue
is recommended by the Board of directors.
Lesson 3 Issue of Securities 107

9. The date of the Board Meeting at which the proposal for bonus issue is proposed to be considered
should be notified to the Stock Exchange(s) where the companys shares are listed.
10. Hold the Board Meeting and get the proposal approved by the Board.
11. Intimate the decision taken at the board meeting to the Stock Exchange(s)
12. A company which announces bonus issue after the approval of board of directors and does not require
shareholders approval for capitalisation of profits or reserves for making bonus issue as per the Articles
of Association, shall implement bonus issue within fifteen days from the date of approval of the issue by
the board of directors of the company and shall not have the option of changing the decision
However, where the company is required to seek shareholders approval for capitalisation of profits or
reserves for making bonus issue as per the Articles of Association, the bonus issue shall be implemented
within two months from the date of the meeting of the board of directors wherein the decision to announce
bonus was taken subject to shareholders approval.
13. Arrangements for convening the general meeting should then be made keeping in view the requirements
of the Companies Act, with regard to length of notice, explanatory statement etc. Also three copies of
the notice should be sent to the Stock Exchange(s) concerned.
14. Approvals of banks, financial institutions, debenture trustees, etc, if required under the related agreements,
shall be obtained before the general meeting.
15. Hold the general meeting and get the resolution for issue of bonus shares passed by the members.
Because of use of words holders of equity shares used in section 81, it would be better to always pass
a special resolution for issuing them to members registered on a particular date, proportionately. A copy
of the proceedings of the meeting is to be forwarded to the concerned Stock Exchange(s). (for specimen
of the resolution, see Annexure VII)
16. Within 30 days of the date of the general meeting, file the necessary returns in the prescribed forms e.g.
e-Form Nos. 5, 23 to the Registrar of Companies with the prescribed filing fees paid electronically.
17. Fix the date for closure of register of members or record date and get the same approved by the Board
of directors. Issue a general notice under Section 154 of Companies Act in respect of the fixation of the
record date in two newspapers one in English language and other in the language of the region in which
the Registered Office of the company is situated.
18. Give stock exchange a notice in advance of at least 7 working days informing it about the closure of
transfer books and record date.
19. After the record date process the transfers received and prepare a list of members entitled to bonus
shares on the basis of the register of members as updated. This list of allottees is to be approved by the
Board or any Committee thereof.
Where any instrument of transfer of shares has been delivered to any company for registration and the
transfer of such shares has not been registered by the company till the date of closure of register of
members, it shall, keep in abeyance in relation to such shares any offer of rights shares under clause (a)
of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance of sub-section
(3) of section 205. [section 206 A (b)]
20. File return of allotment with the Registrar of Companies within 30 days of allotment in e-form no. 2
(Section 75 of the Companies Act) after paying the required fee as per Schedule X of the Act. Attach with
this e-form, list of allottees and a certified copy of the general meeting resolution. Also intimate Stock
Exchange(s) concerned regarding the allotments made.
21. Get the share certificates printed, prepared and issued to the allottees as per the provisions of Companies
108 PP-ACL&P

(Issue of Share Certificates) Rules, 1960 and also make necessary entries in the register. A listed
company has to issue Letters of Allotment within six weeks of the record date or date of reopening of the
Transfer Books after their closure for the purpose of making a bonus issue [clause 23 (f) of listing
agreement].
22. All notices and resolutions of Board and general meeting relating to bonus issue should be sent to the
stock exchange as per clause 31 of listing agreement.
23. Submit an application to the Stock Exchange(s) concerned for listing the bonus shares allotted.
24. Do not issue bonus shares in any manner which may confer on any person, superior rights as to voting
or dividend vis-a-vis the rights on equity shares that are already listed.

Procedure for bonus issue by an unlisted company


1. At the Board meeting resolutions for the following purposes will be passed:
To approve the proposal for the bonus issue
To Approve the resolution to be passed at a general meeting
To approve requisite resolution for increase of the capital and consequential alteration of the memorandum
and the articles (if necessary)
To decide on fixing a record date
2. A general meeting will be convened to pass necessary resolution/s. (for specimen of the resolution, see
Annexure VIII)
3. Within 30 days of the general meeting, file the necessary returns in the prescribed forms e.g. e-Form Nos. 5,
23, etc. to the Registrar of Companies.
4. After the record date, prepare a list of members entitled to the bonus shares on the basis of the register of
members as updated.
5. Convene Board meeting (or of a meeting of committee of directors) for the allotment of bonus shares and allot
the bonus shares.
Under section 206A where any instrument of transfer of shares has been delivered to a company for registration
and the transfer of such shares has not been registered by the company, it shall keep in abeyance issue of fully
paid-up bonus shares in relation to such shares in pursuance of sub-section (3) of section 205.
6. File a return of allotment in e-Form No. 2 with the Registrar within 30 days of the allotment.
7. Prepare and dispatch the share certificates relating to the bonus shares allotted within three months of the
date of allotment and make entries of the shares allotted in the register of members.

8. PROCEDURE TO ISSUE EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS


As per section 86(a)(ii), share capital of a company limited by shares can consists of equity share capital with
differential rights as to dividend, voting or otherwise in accordance with the Companies (Issue of Share Capital
with Differential Voting Rights) Rules, 2001.
1. Check whether the Articles of Association of the company permit issue of equity shares with differential rights
and if not, then alter the Articles of Association of the company.
2. Check whether the expanded capital after the issue is within the authorised share capital of the company. If
not, complete proceedings to increase the authorised share capital suitably.
3. Before issuing shares with differential rights as to dividend, voting or otherwise, ensure the following:
Lesson 3 Issue of Securities 109

(i) company must be a company limited by shares;


(ii) Company must have distributable profits in terms of section 205 for the three financial years preceding
the year in which it decides to issue such shares;
(iii) Company has not defaulted in filing annual accounts and annual returns for the three financial years
immediately preceding the financial year in which it decides to issue such shares;
(iv) Company has not failed to repay its deposits or interest thereon on due date or redeem its debentures
on due date or pay dividend;
(v) Company has not been convicted of any offence arising under the SEBI Act, 1992, the Securities Contracts
(Regulation) Act, 1956, the Foreign Exchange Management Act, 1999;
(vi) Company has not defaulted in meeting investors grievances.
(vii) Shares to be issued with such differential rights must be equity shares only.
4. Before issue of equity shares with differential voting rights, ensure that there is no default in respect of the
payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus, wages,
including minimum wages, compensation to workmen, contract labour payments etc.
5. Convene a Board Meeting after issuing notices to the directors of the company as per Section 286 to decide
about the issue of shares with differential rights as to voting, dividend or otherwise and to fix up the date, time,
place and agenda for convening a General Meeting and to pass an Ordinary or Special Resolution as the case
may be, for the same as required under the provisions of sub-clause (a) of section 94(1) and section 94(2). (for
specimen of the board resolution, see Annexure IX)
6. If the shares of the company are listed with any of the recognised Stock Exchange, then within 15 minutes of
the closure of the aforesaid Board Meeting intimate to the concerned Stock Exchange about the decision taken
at the Board Meeting.
7. Note that the issue of shares with differential voting rights should be made within a period of 6 months from
the date of approval of companys Board of Directors.
8. Issue notices of closure of register of members in at least one English newspaper and one in the principal
language of the district/region in which the companys registered office is situated. For unlisted public companies
and private companies, this requirement is not applicable, unless specifically provided in the Articles.
9. Keep in mind that permission of RBI if any required under section 6(3)(b) of FEMA 1999, should be obtained
to allot shares with differential voting rights to Non-Resident Indians.
10. Issue notices in writing at least twenty-one days before the date of the General Meeting [Section 171(1)] with
suitable Explanatory Statement.
11. If the company is listed, then ensure that it obtains the approval of its shareholders through postal ballot.
Please refer Companies (Passing of Resolutions by postal Ballot) Rules, 2011.
12. Ensure that the aforesaid notice of the General Meeting at which the resolution is proposed to be passed is
accompanied by an Explanatory Statement stating in particular the following:
(a) the rate of voting which the equity share capital with differential voting right shall carry;
(b) the scale in proportion to which the voting rights of such class or type of shares will vary;
(c) the company shall not convert its equity share capital with voting rights into equity share capital with
differential voting rights and the shares with differential voting rights into equity share capital with voting
rights;
110 PP-ACL&P

(d) the shares with differential voting rights shall not exceed 25% of the total share capital issued;
(e) that a member of the company holding any equity share with differential voting rights shall be entitled to
bonus shares, rights shares of the same class;
(f) the holders of the equity shares with differential voting rights shall enjoy all other rights to which the
holder is entitled to excepting right to vote as indicated in (a) above.
13. Hold the General Meeting and pass the Ordinary Resolution by simple majority or the Special Resolution by
three fourths majority [Section 189] as the case may be.
14. If the shares of the company are listed with any of the recognised Stock Exchange, then forward three
copies of the notice and a copy of the proceedings of the General Meeting to the Stock Exchange.
15. File the Special Resolution with the Explanatory Statement with the concerned ROC in e-Form No.23 within
thirty days of the General Meeting.
16. Publish a notice of Record Date for the purpose of determining the eligibility of members for shares with
differential voting rights.
17. If the shares of the company are listed with any of the recognised Stock Exchange, then give notice to the
Stock Exchange 21 days in advance (fifteen days in case of such securities which are announced by SEBI from
time to time for compulsory delivery in dematerialized form by all investors), stating the dates of closure of its
Transfer Books (or, when the Transfer Books are not to be closed, the date fixed for taking a record of its
shareholders or debenture holders) and specifying the purpose or purposes for which the Transfer Books are to
be closed (or the record is to be taken)
18. Convene another Board Meeting by giving notice to all the directors of the company as per section 286 and
complete proceeding regarding allotment of the shares in the proportion and in the manner as mentioned in the
resolution and as approved by the Stock Exchange. A board resolution should be passed for allotment of shares
with differential voting rights and filing of e-form 2.
19. Within 30 days of allotment of shares a return in e-form 2 should be filed through MCA portal www.mca.gov.in.
together with the prescribed filing fees paid electronically.
20. Complete all other proceedings for the issue of certificates of shares with differential voting rights making
necessary entries in various registers. In case of a company whose shares are dematerialized, inform the
Depositories about the same for credit to the respective accounts.
21. Make necessary changes in every copy of the Memorandum and Articles of Association and in all other
papers and documents immediately after the paid-up share capital is increased.
22. Maintain a register as required under section 150 containing the particulars of differential rights to which the
holder is entitled to.

Point need to know


As per newly inserted clause 28A under Equity Listing Agreement, a listed company shall not issue
shares in any manner which may confer on any person, superior rights as to voting or dividend vis--
vis the rights on equity shares that are already listed.
It puts a bar on the company to issue any class of shares with rights superior (in terms of dividend and
voting rights) in comparison to the shares of the same class, which are already listed.
For example, Class A shares of XYZ Limited are already listed on the Stock Exchange, then XYZ
Limited cannot make further issue of shares of Class A with superior rights in comparison to those
Class A shares which are already listed.
Lesson 3 Issue of Securities 111

9. ISSUE OF SHARES ON PREFERENTIAL BASIS/PRIVATE PLACEMENT


In certain situations, it may not be desirable to issue shares to the public at large. Since issuing shares to the
public is a very detailed and expensive exercise. It may be avoided where the issue size is small which can be
fully subscribed by the directors and existing shareholders. Even where the issue size exceeds the resources
that can be raised from directors and existing shareholders, there is a possibility of placing shares privately with
friends, associates, financial institutions, mutual funds, etc. There could also be a situation where the company
has not posted good results and hence hesitates to float a public issue. Depressed primary market conditions,
disappointing financial performance or adverse business developments may also deter companies from raising
funds from the public. In these situations, company may opt for issue of shares by private placement.
Unlisted Public Companies (Preferential Allotment) Rules, 2003 contain the provisions relating to making of
preferential allotment by unlisted companies. These rules have been amended by Unlisted Public Companies
(Preferential Allotment) Amendment Rules, 2011.
As per the amended rules, preferential allotment means allotment of shares or any other instrument convertible
into shares including hybrid instruments convertible into shares on preferential basis made pursuant to the
provisions of sub-section (1A) of section 81 of the Companies Act, 1956 :
Provided that the name, fathers name, address and occupation of persons to whom such allotment is proposed
to be made shall be mentioned in the resolution passed by the members under that sub-section:
Provided further that persons to whom such offer is proposed, shall not be more than forty-nine as per the first
proviso to sub-section (3) of section 67 of the Companies Act, 1956.
Procedure for issue of shares by private placement
Note: Please note that offer or invitation to subscribe for shares or debentures made by companies (other than
NBFCs or PFIs) to 50 persons or more will be treated as public issue [Proviso to sub-sec. (3) of section 67].
1. To ensure that the issue is within the authorized share capital of the company; otherwise to increase the same
by following the proper procedure.
2. If the company is an unlisted public company, then follow the provisions of Unlisted Public Companies
(Preferential Allotment) Amendment Rules, 2011 which have amended the said Rules of 2003.
3. Call a Board Meeting after giving notice to all the directors of the company as per section 286 to fix up the
date, time, place and agenda for a General Meeting to pass an Ordinary or Special Resolution as the case may
be. No issue of shares on a preferential basis can be made by a company unless authorized by its articles of
association and unless a special resolution is passed by the members in a General Meeting authorizing the
Board of Directors to issue the same.
4. In case of a public company, a Special Resolution or an Ordinary Resolution followed by the Central
Governments approval under Section 81 should be passed unless the allotment is made within two years from
the formation of company or within one year from the allotment of shares made for the first time after formation,
whichever is earlier.
5. In case of first allotment, the provisions of Section 70 should also be complied with i.e. a statement in lieu of
prospectus has to be filed with the Registrar as per Schedule III.
6. In case of unlisted public company, where warrants are issued on a preferential basis with an option to apply
for and get the shares allotted, the issuing company shall determine before hand the price of the resultant
shares.
7. In case of a private company, to pass an Ordinary or a Special Resolution, if the Articles so require; otherwise
the Board can issue the shares.
112 PP-ACL&P

8. Issue notices in writing at least twenty-one days before the date of the General Meeting proposing the Special
or Ordinary Resolution as the case may be with suitable Explanatory Statement.
9. In case of an unlisted company, the explanatory statement to the notice for the general meeting in terms of
Section 173 of the Companies Act, 1956 shall contain the following particulars:
(a) the price or price band at which the allotment is proposed;
(b) the relevant date on the basis of which price has been arrived at;
(c) the object/s of the issue through preferential offer;
(d) the class or classes of persons to whom the allotment is proposed to be made;
(e) intention of promoters/directors/key management persons to subscribe to the offer;
(f) shareholding pattern of promoters and others classes of shares before and after the offer;
(g) proposed time within which the allotment shall be completed;
(h) whether a change in control is intended or expected.
10. A listed issuer may make a preferential issue of equity shares and convertible securities, if:
(a) a special resolution has been passed by its shareholders;
(b) all the equity shares, if any, held by the proposed allottees in the issuer are in dematerialised form;
(c) the issuer is in compliance with the conditions for continuous listing of equity shares as specified in the
listing agreement with the recognised stock exchange where the equity shares of the issuer are listed;
(d) the issuer has obtained the Permanent Account Number of the proposed allottees.
The listed issuer shall not make preferential issue of equity shares and convertible securities to any person who
has sold any equity shares of the issuer during the six months preceding the relevant date:
Where equity shares and convertible securities are issued on a preferential basis to promoters, their relatives,
associates and related entities for consideration other than cash, the valuation of the assets in consideration for
which the equity shares are issued shall be done by an independent qualified valuer, which shall be submitted
to the recognised stock exchanges where the equity shares of the issuer are listed:
11. Hold the General Meeting and pass the resolutions. If an Ordinary Resolution under Section 81 is passed,
proceed to obtain the Central Governments approval in accordance with that section. For this purpose an
application need to be made to the Central Government in e-form no. 65.
12. If any Special Resolution is passed, file the same with the concerned ROC in e-Form No. 23 within thirty
days of the passing after paying the requisite fee prescribed under Schedule X to the Act.
In case of listed company, allotment pursuant to the special resolution shall be completed within a period of 15
days from the date of passing of such resolution: If the allotment of specified securities is not completed within
fifteen days from the date of special resolution, a fresh special resolution shall be passed. However the requirement
of allotment within 15 days shall not apply to allotment of specified securities on preferential basis pursuant to a
scheme of corporate debt restructuring as per the corporate debt restructuring framework specified by the
Reserve Bank of India.
Further, in case of unlisted public company, the special resolution shall be acted upon within a period of 12 months.
13. Receive applications by private negotiations and complete proceedings regarding allotment of shares.
14. In case of unlisted public companies, the Unlisted Public Companies (Preferential Allotment) Amendment
Rules, 2011 provide as under:
Lesson 3 Issue of Securities 113

(a) all monies payable on subscription of securities shall be paid through cheque or demand draft or other
banking channels and not by cash and the allotment shall be completed within sixty days from the date
of receipt of share application money. If allotment is not made within that period, the company shall
repay the application money within fifteen days thereafter, failing which it will be required to be repaid
with interest at the rate of twelve per cent per annum.
(b) all monies received on such application shall be kept in a separate bank account and shall not be
utilized for any purpose other than (a) for adjustment against allotment of securities or (b) for the repayment
of monies, where the company is unable to allot securities.
(c) further, no such unlisted public company offering securities shall release any public advertisements, or
utilize any media, marketing or any distribution channels or agents to inform the public at large about
any such offer.
(d) no fresh offer or invitation shall be made unless the allotment with respect to any offer or invitation made
earlier have been completed in terms of sub-section (9) of section 60B of the Companies Act, 1956.
(e) any offer or invitation not in compliance with sub-section (1A) of section 81 read with sub-section (3) of
section 67 of the said Act, shall be treated as a public offer and the provisions of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of
1992) shall be complied with
15. If shares are to be allotted on direct/private placement to Central/ State Government, their agencies, public
financial institutions and Mutual Funds, obtain their agreement to the proposed investment.
16. Proceed to complete other formalities such as issue of allotment letters, share certificates, filing of allotment
return, making entries in various registers etc.
17. File return of allotment in e-Form No. 2 within thirty days from the date of allotment with necessary details
and enclosures with the concerned ROC after paying the requisite fee as prescribed under Schedule X to the
Act.
18. Send allotment letters or share certificates as the case may be within three months from the date of allotment
to the allottees.
19. If the company is a listed company then in addition to the aforesaid requirements, other provisions of Chapter
VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 are also required to be
followed.

Lock-in period as per SEBI (ICDR) Guidelines, 2009


The specified securities allotted on preferential basis to promoter or promoter group and the equity shares
allotted pursuant to exercise of options attached to warrants issued on preferential basis to promoter or promoter
group, shall be locked-in for a period of three years from the date of allotment of the specified securities or equity
shares allotted pursuant to exercise of the option attached to warrant, as the case may be:
Provided that not more than twenty per cent. of the total capital of the issuer shall be locked-in for three years
from the date of allotment:
Provided further that equity shares allotted in excess of the twenty per cent. shall be locked-in for one year from
the date of their allotment pursuant to exercise of options or otherwise, as the case may be.
The specified securities i.e. equity shares and convertible securities allotted on preferential basis and the equity
shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to any person
other than the promoter / promoter group of the issuer shall be locked-in for a period of one year from the date
of their allotment.
114 PP-ACL&P

The lock-in on shares acquired by conversion of the convertible instrument other than warrants shall be reduced
to the extent the convertible instrument other than warrants have already been locked-in.
Certificate by Statutory Auditor/Company Secretary in practice
A listed issuer shall place a copy of the certificate of its statutory auditor before the general meeting of the
shareholders, considering the proposed preferential issue, certifying that the issue is being made in accordance
with the requirements of SEBI (ICDR) Regulations, 2009.
If the company is an unlisted public company then in case of every issue of shares/warrants/fully convertible
debentures/partly convertible debentures or other financial instruments with conversion option, the statutory
auditors of the issuing company / company secretary in practice shall certify that the issue of the said instruments
is being made in accordance with Unlisted Public Companies (Preferential Allotment) Rules, 2003. Such certificate
shall be laid before the meeting of the shareholders convened to consider the proposed issue.

10. EMPLOYEE STOCK OPTIONS


The term Employee Stock Option (ESOP) has been defined under Sub-section (15A) of Section 2 of the
Companies Act, 1956, according to which employee stock option means the option given to the whole-time
directors, officers or employees of a company, which gives such directors, officers or employees, the benefit or
right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.
Section 77A of the Companies Act, 1956, provided for buy-back of its own securities by a company, subject to
safeguard specified therein. The provisions apply to buy-back of shares and other specified securities. In terms
of explanation (a) to the section, specified securities includes shares issued under employees stock option
scheme.
Clause (d) of Sub-section (5) of Section 77A allows buy-back by a company of shares issued to employees
under stock option scheme or sweat equity.
Sub-section (8) of Section 77A prohibits a company which has made a buy-back of its shares or other specified
securities from making further issue of the same kind of shares or other specified securities within a period of 6
months. However, the prohibition does not apply to further issue under employee stock option scheme or sweat
equity.
SEBI has issued SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
1999 according to which Employee Stock Option Scheme means a scheme under which the company grants
option to its employees and option means a right but not an obligation granted to an employee in pursuance of
ESOS to apply for shares of the company at a pre-determined price.
An employee shall be eligible to participate in ESOS of the company.
Explanation: Where such employee is a director nominated by an institution as its representative on the Board
of Directors of the company
(i) the contract/agreement entered into between the institution nominating its employee as the director of a
company and the director so appointed shall, inter alia, specify the following:
(a) whether options granted by the company under its ESOS can be accepted by the said employee in
his capacity as director of the company;
(b) that options, if granted to the director, shall not be renounced in favour of the nominating institution;
and
(c) the conditions subject to which fees, commissions, ESOSs, other incentives, etc. can be accepted
by the director from the company.
Lesson 3 Issue of Securities 115

(ii) the institution nominating its employee as a director of a company shall file a copy of the contract/
agreement with the said company, which shall, in turn, file the copy with all the stock exchanges on
which its shares are listed.
(iii) the director so appointed shall furnish a copy of the contract/agreement at the first Board meeting of the
company attended by him after his nomination.
An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS.
A director who either by himself or through his relative or through any body corporate, directly or indirectly holds
more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESOS.
The issue of ESOPs is subject to approval by shareholders through a special resolution. In the cases, where
employees are offered more than 1% shares, a specific disclosure and approval is necessary at the annual
general meeting.
A minimum period of one year between grant of options and its vesting has been prescribed. After one year, the
period during which the option can be exercised would be determined by the company.
The operation of the ESOP Scheme would have to be under the superintendence and direction of a Compensation
Committee of the Board of directors in which there would be a majority of independent directors. With the
specific approval of the shareholders, the scheme would be allowed to cover the employees of a subsidiary or
a holding company.
Directors report shall contain the following disclosures:
(i) the total number of shares covered by the ESOP as approved by the shareholders;
(ii) the pricing formula;
(iii) options granted, options vested, options exercised, options forfeited, extinguishment or modification of
options, money realised by exercise of options, total number of options in force, employee-wise details
of options granted to senior managerial personnel and to any other employee who receive a grant in
any one year of options amounting to 5% or more of options granted during that year.
(iv) Fully diluted earning per share (EPS) computed in accordance with International Accounting
Standards.
Articles of Association must contain the provisions for Employees Stock Options. If it does not have such provision,
then alteration of the articles needs to be done. For the specimen resolution to alter the Articles of Association,
see Annexure X.

Procedure for issue of securities to employees through Employees Stock Option Scheme or
Employees Stock Purchase Scheme
I. Employees Stock Option Scheme
1. Ensure that securities are not issued to promoters under the Employees Stock Option Scheme (ESOS) even
if the promoters are employees of the company or belong to the promoters group of the company.
2. In case an employee is a director nominated by an institution as its representative on the Board of the
company then ensure that such institution files a copy of the contract agreement with the company. File a copy
of it with all stock exchanges on which companys shares are listed.
3. A director who is not a promoter but is an employee is entitled to receive securities under the scheme provided
that he either by himself or through his relative or through any body corporate directly or indirectly does not hold
more than 10% of the outstanding equity shares of the company.
4. Under ESOS an employee means a permanent employee of the company working in India or out of India or
116 PP-ACL&P

a director of the company whether a whole-time director or not or a permanent employee or a director of a
subsidiary in India or out of India or of a holding company of the company.
5. Constitute a Compensation Committee for administrative and superintendence of the ESOS which should be
a Committee of the Board of Directors consisting of a majority of independent directors by passing a Board
Resolution. (for specimen of the board resolution for constitution of the Committee, see Annexure XI)
6. Before offering ESOS, disclosures as specified in Schedule IV are required to be made by the company to the
prospective option grantees.
7. Ensure that the said compensation formulates the detailed terms and conditions of the ESOS (for specimen
of the Employees Stock Option Scheme, see Annexure XII) including:
(a) the quantum of option to be granted under an ESOS per employee and in aggregate;
(b) the conditions under which option vested in employees may lapse in case of termination of employment
for misconduct;
(c) the exercise period within which the employee should exercise the option and that option would lapse
on failure to exercise the option within the exercise period;
(d) the specified time period within which the employee shall exercise the vested options in the event of
termination or resignation of an employee;
(e) the right of an employee to exercise all the options vested in him at one time or at various points of time
within the exercise period;
(f) the procedure for making a fair and reasonable adjustment to the number of options and to the exercise
price in case of corporate actions such as rights issue, bonus issues, merger, sale of division and
others. In this regard the following should be taken into consideration by the compensation committee
(i) the number and the price of ESOS shall be adjusted in a manner such that total value of the ESOS
remains the same after the corporate action;
(ii) for this purpose global best practices in this area including the procedures followed by the derivative
markets in India and abroad shall be considered.
(iii) the vesting period and the life of the options shall be left unaltered as far as possible to protect the
rights of the option holders.
(g) the grant, vest and exercise of option in case of employees who are on long leave; and
(h) the procedure for cashless exercise of options.
8. Further ensure that the said Compensation Committee frames suitable policies and systems to ensure that
there is no violation of the SEBI (Insider Trading) Regulations, 1992 and the SEBI (Prohibition of Fraudulent and
Unfair Trade Practices relating to the Securities Market) Regulations, 1995 by any employee.
9. The company has freedom to determine the exercise price subject to adherence to the accounting policies. In
case the company calculates the employee compensation cost using the intrinsic value of the stock options, the
difference between the employee compensation cost so computed and the employee compensation cost that
shall have been recognized if it had used the fair value of the options, is required to be disclosed in the Directors
report and also the impact of this difference on profits and on Earning Per Share of the company shall also be
disclosed in the Directors report.
10. There should exist a minimum period of one year between the grant of options and vesting of options.
11. The company has the freedom to specify the lock-in-period for the shares issued pursuant to exercise of
option.
Lesson 3 Issue of Securities 117

12. The employee does not have the right to receive any dividend or to vote or in any manner enjoys the benefits
of a shareholder in respect of option granted to him, till shares are issued on exercise of option.
13. Convene a Board Meeting after giving notice to all the directors of the company as per section 286 to fix the
date, time, place and agenda of the General Meeting to pass a special resolution under section 81(1A).
14. Prepare the Explanatory Statement to be accompanied with the notice of the General Meeting and ensure
that it contains the following information:
(a) the total number of options to be granted;
(b) identification of classes of employees entitled to participate in the ESOS;
(c) requirements of vesting and period of vesting;
(d) maximum period within which the options shall be vested;
(e) exercise price or pricing formula;
(f) exercise period and process of exercise;
(g) the appraisal process for determining the eligibility of employees to the ESOS;
(h) maximum number of options to be issued per employee and in aggregate;
(i) a statement to the effect that the company shall conform to the accounting policies as specified in
Schedule I to the ESOS.
(j) the method which the company shall use to value its options whether fair value or intrinsic value.
(k) In case the company calculates the employee compensation cost using the intrinsic value of the stock
options, the difference between the employee compensation cost so computed and the employee
compensation cost that shall have been recognized if it had used the fair value of the options, shall be
disclosed in the Directors report and also the impact of this difference on profits and on EPS of the
company shall also be disclosed in the Directors report.
15. Issue notices at least twenty-one days before the date of the General Meeting proposing the Special Resolution
with suitable Explanatory statement. [Section 171(1) read with section 173 (2)].
16. Obtain approval of shareholders by way of separate resolution in case of grant of option to employees of
subsidiary or holding company and also in case of grant of option to identified employees, during any one year,
equal to or exceeding 1 % of the issued capital (excluding outstanding warrants and conversions) of the company
at the time of grant of option.
17. Hold the General Meeting and pass the Special Resolution by three fourths majority under section 81(1A)
authorising issue of securities to employees under the Scheme spelling out the terms of the issue. (for specimen
of the board and special resolution, see Annexure XIII)
18. Send three copies of the notice and a copy of the proceedings of the General Meeting to the Stock Exchange.
19. File with the concerned ROC a certified true copy of the Special Resolution with Explanatory Statement in e-
Form No. 23 within thirty days of passing of the resolution [Section 192] after paying the requisite fees prescribed
under Schedule X to the Act in cash or by demand draft. Also ensure that the said e-form is digitally singed by the
Managing Director or director or manager of secretary of the company duly authorised by the Board. This e-form
has also to be certified by a Company Secretary or Chartered Accountant or Cost Accountant in whole time
practice.
20. File with the concerned ROC a return of allotment in e-Form No. 2 within thirty days of passing of the Special
Resolution [Section 75] after paying the requisite fee as above.
118 PP-ACL&P

21. Note the following:

(i) there will be no restriction on the maximum number of shares to be issued to a single employee, but if
an employee is offered more than 1% share, specific disclosure and approval would be necessary in the
annual general meeting by passing a special resolution.
(ii) companies can issue share to their permanent employees at a discount to the market price and this will
not be covered by the pricing policy of SEBIs preferential allotment guidelines.

22. The company may by passing a special resolution again in a general meeting vary the terms of ESOS
offered pursuant to an earlier resolution of a general body but not yet exercised by the employee provided such
variation is not prejudicial to the interests of the option holders.

23. Ensure that the notice for passing the special resolution for variation of terms of ESOS discloses full details
of the variation, the rationale thereof and the details of the employees who are beneficiary of such variation.
24. A company may re-price the options which are not exercised if ESOSs were rendered unattractive due to fall
in the price of the shares in the market. Provided that the company ensures that such re-pricing shall not be
detrimental to the interest of employees and approval of shareholders in General Meeting has been obtained for
such re-pricing.

25. Forfeit the amount payable by the employee if any, at the time of grant of option if the option is not exercised
by the employee within the exercise period.

26. Refund the amount to the employee if the options are not vested due to non-fulfillment of condition relating
to vesting of option as per the ESOS.

27. Please note that:

(i) the option granted to an employee is not transferable to any person.


(ii) no person other than the employee to whom the option is granted is entitled to exercise the option.

(iii) the option granted to the employee is not pledged, hypothecated, mortgaged or otherwise alienated in
any other manner.

(iv) in case the employee suffers a permanent incapacity while in employment, all the options granted to
him as on the date of permanent incapacitation are vested in him on that day.
(v) in the event of resignation or termination of the employee, all options which have not vested as on that
day expire.

(vi) Options granted to a director who is an employee of institution and has been nominated by the said
institution, is not renounced in favour of the institution nominating him.

28. Note that under the cashless system of exercise the company may itself fund or permit the empanelled stock
brokers to fund the payment of exercise price which is to be adjusted against the sale proceeds of some or all
the shares, subject to the provision of the Act.
29. Ensure that in the event of the death of employee while in employment, all the options granted to him till such
date are vested in the legal heirs or nominees of the deceased employee.

30. The options granted to a director, who is an employee of an institution and has been nominated by the said
institution, shall not be renounced in favour of the institution nominating him.

31. Ensure that the Board of Directors, discloses either, in the Directors Report or in the Annexure to the Directors
Report, the following details of ESOS:
Lesson 3 Issue of Securities 119

(a) options granted;


(b) the pricing formula;
(c) options vested;
(d) options exercised;
(e) the total number of shares arising as a result of exercise of option;
(f) options lapsed;
(g) variation of terms of options;
(h) money realised by exercise of options;
(i) total number of options in force;
(j) employee-wise details of options granted to
(i) senior managerial personnel;
(ii) any other employee who receives a grant in any one year of option amounting to 5% or more of
option granted during that year;
(iii) identified employees who were granted option, during any one year, equal to or exceeding 1% of
the issued capital (excluding outstanding warrants and conversions) of the company at the time of
grant.
(k) diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in
accordance with Accounting Standard 20 Earning Per Share.
(l) Where the company has calculated the employee compensation cost using the intrinsic value of the
stock options, the difference between the employee compensation cost so computed and the employee
compensation cost that shall have been recognised if it had used the fair value of the options, shall be
disclosed. The impact of this difference on profits and on EPS of the company shall also be disclosed.
(m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed
separately for options whose exercise price either equals or exceeds or is less than the market price of
the stock.
(n) A description of the method and significant assumptions used during the year to estimate the fair values
of options, including the following weighted average information:
(1) risk-free interest rate,
(2) expected life,
(3) expected volatility,
(4) expected dividends, and
(5) the price of the underlying share in market at the time of option grant.
32. Until all options granted in the three years prior to the IPO have been exercised or have lapsed, disclosure
shall be made either in the Directors Report or in an Annexure thereto of the impact on the profits and on the
EPS of the company if the company had followed the accounting policies specified in Schedule I of the Guidelines
In the case of every company that has passed a resolution for an ESOS, the Board of Directors shall at each
annual general meeting place before the shareholders a certificate from the auditors of the company that the
scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the
company in the general meeting.
120 PP-ACL&P

33. Further ensure that the Board of Directors of the company place before the shareholders of each annual
general meeting, a certificate from the auditors of company that the scheme has been implemented in accordance
with these guidelines and in accordance with the resolution passed at companys general meeting.
34. Ensure that if any option is outstanding at the time of an initial public offering by the company the promoters
contribution is calculated with reference to the enlarged capital which would arise on exercise of all vested
options.
35. If any options granted to employees in pursuance of pre-IPO ESOS are outstanding at the time of IPO, the
IPO document of the company shall disclose all the information as specified and also the following information:
(a) The impact on the profits and on the EPS of the last three years if the company had followed the
accounting policies specified in Schedule I in respect of options granted in the last three years.
(b) The intention of the holders of shares allotted on exercise of option granted under ESOS or allotted
under ESPS, to sell their shares within three (3) months after the date of listing of shares in such IPO
(aggregate number of shares intended to be sold by option holders), if any, has to be disclosed. In case
of ESOS the same shall be disclosed regardless of whether the shares arise out of options exercised
before or after the IPO.
(c) Specific disclosures about the intention to sell shares arising out of ESOS or allotted under ESPS within
three (3) months after the date of listing, by directors, senior managerial personnel and employees
having ESOS or ESPS shares amounting to more than 1% of the issued capital (excluding outstanding
warrants and conversions), which inter-alia shall include name, designation and quantum of ESOS or
ESPS shares and quantum they intend to sell within three (3) months.
(d) A disclosure regarding all the options/shares issued in last three (3) years (separately for each year)
and on a cumulative basis for all the options/shares issued prior to date of the prospectus
II. Employees Stock Purchase Scheme (ESPS)
1. There is an eligibility criteria to participate in the scheme:
(i) An employee eligible to participate in the scheme should be:
(a) a permanent employee of the company working in India or out of India; or
(b) a director of the company, whether a whole time director or not;
(c) an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or out of India, or of a
holding company of the company.
(ii) The employee should neither be a promoter nor belongs to the promoter group.
(iii) A director who either by himself or through his relatives or through any body corporate, directly or
indirectly holds more than 10% of the outstanding equity shares of the company can not participate, as
he is not eligible to participate in the scheme.
2. Make arrangements for holding the general meeting to approve the Scheme by passing a special resolution.
3. The explanatory statement to the notice is required to be sent to the shareholders and it should specify the
following
(a) the price of the shares and also the number of shares to be offered to each employee;
(b) the appraisal process for determining the eligibility of employees for the scheme;
(c) total number of shares to be issued.
The company has freedom to determine the price of shares to issued under ESPS provided it conforms to
Lesson 3 Issue of Securities 121

accounting policies as specified in Schedule II of SEBI (Employee Stock Option Scheme and Stock Purchase
Scheme) Guidelines, 1999.
4. The number of shares offered may be different for different categories of employees.
5. The special resolution must state that the company should conform to the accounting policies as specified in
Schedule II of SEBI (Employee Stock Option Scheme and Stock Purchase Scheme) Guidelines, 1999.
6. Approval of shareholders must be obtained by way of separate resolution in the general meeting in case of
(a) allotment of shares to employees of subsidiary or holding company and;
(b) allotment of shares to identified employees, during any one year, equal to or exceeding 1% of the
issued capital (excluding outstanding warrants and conversions) of the company at the time of allotment
of shares.
7. The Pricing and Lock-in-Period requirements are as follows:
(i) The company has the freedom to determine price of shares to be issued under an ESPS, provided they
comply with the accounting policies specified.
(ii) The shares issued under an ESPS are subject to lock-in for a minimum period of one year from the date
of allotment:
Provided that in a case where shares are allotted by a company under a ESPS in lieu of shares acquired
by the same person under an ESPS in another company which has merged or amalgamated with the
first mentioned company, the lock in period already undergone in respect of shares of the transferor
company shall be adjusted against the lock-in required under this clause.
(iii) If the scheme is part of a public issue and the shares are issued to employees at the same price as in the
public issue, the shares issued to employees under the scheme are not subject to any lock-in-period.
8. The Directors Report or Annexure thereto should contain, inter alia, the following disclosures:
(a) the details of the number of shares issued in the scheme;
(b) the price at which such shares are issued;
(c) employee-wise details of the shares issued to:
(i) senior managerial personnel;
(ii) any other employee who is issued shares in any one year amounting to 5% or more shares issued
during that year;
(iii) identified employees who were issued shares during any one year equal to or exceeding 1% of the
issued capital of the company at the time of issuance;
(d) diluted Earning Per Share (EPS) pursuant to issuance of shares under the scheme; and
(e) consideration received against the issuance of shares.
9. Every company passing a resolution for the scheme must comply with the accounting policies as specified in
Schedule II to SEBI (Employee Stock Option Scheme and Employee Stock Purchase) Guidelines, 1999.
10. Nothing in the guidelines applies to shares issued to employees in compliance with the Securities and
Exchange Board of India Guidelines on Preferential Allotment.
11. The shares arising pursuant to an ESOS and shares issued under an ESPS are required to be listed
immediately upon exercise in any recognized stock exchange where the securities of the company are listed
subject to compliance of the following:
122 PP-ACL&P

(a) The ESOS/ESPS is in accordance with these Guidelines.


(b) In case of an ESOS the company has also filed with the concerned stock exchanges, before the exercise
of option, a statement as per Schedule V and has obtained in-principle approval from such Stock
Exchanges.
(c) As and when ESOS/ESPS are exercised the company has notified the concerned Stock Exchanges as
per the statement as per Schedule VI.
12. The shares arising after the IPO, out of options granted under any ESOS framed prior to its IPO shall be
listed immediately upon exercise in all the recognised stock exchanges where the equity shares of the company
are listed subject to compliance with Point no. 33 of ESOS discussed earlier and, where applicable, under
mentioned point.
13.(1) No listed company shall make any fresh grant of options under any ESOS framed prior to its IPO and prior
to the listing of its equity shares (hereinafter in this clause referred to as pre-IPO scheme) unless:

(i) such pre-IPO scheme is in conformity with these guidelines; and,

(ii) such pre-IPO scheme is ratified by its shareholders in general meeting subsequent to the IPO.

Provided that the ratification under item (ii) may be done at any time prior to grant of new options under
such pre-IPO scheme.
(2) No change shall be made in the terms of options issued under such pre-IPO schemes, whether by repricing,
change in vesting period or maturity or otherwise, unless prior approval of the shareholders is taken for such
change. Provided that nothing in this sub-clause shall apply to any adjustments for corporate actions made in
accordance with these guidelines.]

14. For listing of shares issued pursuant to ESOS or ESPS the company is required to make application to the
Central Listing Authority as per SEBI (Central Listing Authority) Regulations, 2003 and obtain the in-principle
approval from Stock Exchanges where it proposes to list the said shares.
15. The provisions relating to lock-in of pre-IPO shares specified in SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 shall not be applicable to the shares allotted to employees other than promoters
before the IPO under a pre-IPO ESOS/ESPS.

16. The ESOP/ESPS share held by the promoters prior to Initial Public Offering shall be subject to lock-in as per
the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
17. The listed companies are required to file the ESOS or ESPS Schemes through EDIFAR filing.
18. When holding company issues ESOS/ESPS to the employee of its subsidiary, the cost incurred by the
holding company for issuing such options/shares is required to be disclosed in the notes to accounts of the
financial statements of the subsidiary company.
19. The company is required to appoint a registered Merchant Banker for the implementation of ESOS and
ESPS as per these guidelines till the stage of framing ESOS/ESPS and obtaining in principle approval of stock
exchange.

ESOS/ESPS through Trust Route


In case ESOS/ESPS are administered through a Trust Route, the accounts of the company shall be prepared as
if the company itself is administering the ESOS/ ESPS.
Lesson 3 Issue of Securities 123

11. SWEAT EQUITY SHARES


The provisions relating to Sweat Equity shares are dealt in section 79A of the Companies Act, 1956. In respect
of the companies which are already listed or those companies which propose to obtain listing, issue of Sweat
Equity Shares is administered by SEBI. In respect of other companies, it is administered by the Central
Government.
The term sweat equity in literal sense denotes an interest in a property earned by a talent in return by labour
towards upkeep or restoration (The New Oxford Dictionary of English). The expression sweat equity shares as
defined in explanation II to Section 79A means equity shares issued by the company to employees or directors
at a discount or for consideration other than cash for providing know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name called.
The New Oxford Dictionary of English defines intellectual property as intangible property that is a result of
creativity, such as patents, copyrights, etc. The term value addition here means any valuable contribution made
by an employee which is not covered by the term Intellectual property rights.
Sweat equity shares are different from shares issued by a company under Employee Stock Option Scheme
(ESOS) and Employee Stock Purchase Scheme (ESPS).
Section 79A of the Companies Act enables companies to reward their employees by way of sweat equity. These
shares are not different from the other shares issued by the company. Sweat equity may be issued by companies
formed under the Companies Act as well as subsidiaries of such companies. Foreign companies and bodies
corporate as defined under section 2(7) are excluded from the ambit of this section.
In accordance with sub-section (I) of section 79A, a company means the company incorporated, formed and
registered under the Companies Act, 1956 and includes its subsidiary company incorporated in a country outside
India. Sweat equity can be issued only of a class of shares already issued. Companies Act permits sweat equity
to be issued to employees or directors.
Companies may price the shares freely and may offer any discount. However, in the case of issue of shares at
a discount, an ordinary resolution authorizing sweat equity shares must specify the maximum rate of discount.
The consideration for the shares may be cash or for any consideration other than cash. Since the issue of sweat
equity by a company to its directors and employees is a non-rights issue under section 81 of the Act, the
authorization by a special resolution in terms of sub-section (1A) of section 81 will be required.
According to clause (c) of sub-section (1), sweat equity shares can be issued only after one year has elapsed
from the date on which the company was entitled to commence business. All limitations, restrictions and provisions
relating to equity shares will be applicable to such Sweat Equity Shares issued under sub-section (1) of section
79A. [Section 79A(2)]
For listed Companies, the sweat equity shares are issued in accordance with the Securities and Exchange
Board of India (Issue of Sweat Equity) Regulations, 2002. The unlisted companies can issue such shares in
accordance with the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.

Procedure to Issue Sweat Equity Shares (In case of Listed Companies) [Section 79A]
1. The issue of sweat equity must be authorized by Articles of Association.
2. Ensure that at least 1 year has elapsed since the date on which the company was entitled to commence
business.
3. Decide before convening a Board Meeting, the number of shares, their current market price and consideration,
if any, and the class or classes of directors or employees to whom such of Sweat Equity Shares are proposed to
be issued.
124 PP-ACL&P

4. Convene a Board Meeting after giving notice to the directors of the company as per section 286 to consider
the proposal of issue of Sweat Equity Shares and to fix up the date, time, place and agenda for the General
Meeting and to pass an Special Resolution for the same. (for specimen of the board resolution, see Annexure
XIV)
5. Issue notices in writing at least twenty one days before the date of the meeting for the General Meeting with
suitable explanatory statement.
6. The proposed Special Resolution must specify the number of shares, their current market price and
consideration, if any and the class or classes of directors or employees to whom such Sweat Equity Shares are
to be issued. [Section 79 A (1)(b)]
7. The Explanatory Statement to the notice and the resolution for approving the issuance of sweat equity should
inter alia contain the following information :
(i) the total amount of shares to be issued as sweat equity;
(ii) the current market price of the shares of the company;
(iii) the value of the intellectual property rights or technical know how or other value addition to be received
from the employee or director along with the valuation report / basis of valuation;
(iv) the names of the employees or directors or promoters to whom the sweat equity shares shall be issued
and their relationship with the company;
(v) the consideration to be paid for the sweat equity;
(vi) the price at which the sweat equity shares shall be issued;
(vii) ceiling on managerial remuneration, if any, which will be affected by issuance of such sweat equity;
(viii) a statement to the effect that the company shall conform to the accounting policies as specified by the
Board.
(ix) diluted Earning Per Share pursuant to the issue of securities to be calculated in accordance with International
Accounting Standards / Standards specified by the Institute of Chartered Accountants of India
8. Listed companies must pass the special resolution in its general meeting, for issue of sweat equity shares to
employees and directors.
9. If the sweat equity shares are to be issued by a listed company to its promoters, obtain the approval of
shareholders:
(a) by simple majority in general meeting; and
(b) also through postal ballot as specified under the Companies (Passing of Resolution by Postal Ballot)
Rules, 2011
Further, the promoters to whom such Sweat Equity Shares are proposed to be issued shall not participate in
such resolution. Each transaction of issue of Sweat Equity shall be voted by a separate resolution. The resolution
for issue of Sweat Equity shall be valid for a period of not more than twelve months from the date of passing of
the resolution.
10. Hold the General Meeting and pass the Special Resolution by three-fourths majority.
11. File the Special Resolution with the concerned ROC with explanatory statement in e- Form No. 23 within
thirty days after paying requisite fee under Schedule X of the Act in cash or by demand draft.
12. If the shares of the company are listed with the Stock Exchange, then forward three copies of the notice and
a copy of the proceedings of the General Meeting to the Stock Exchange.
Lesson 3 Issue of Securities 125

13. A board resolution should be passed for allotment of shares with differential voting rights and filing of
e-form 2.
14. W ithin 30 days of allotment of shares a return in e-form 2 should be filed through MCA portal
www.mca.gov.in.with requisite filing fees electronically.
15. Complete post issue formalities.
16. If the shares of the company are listed with any of the recognised Stock Exchange, then issue of the Sweat
Equity Shares shall be in accordance with the Securities Exchange Board of India (Issue of Sweat Equity)
Regulations, 2002.
17. If the companys equity shares are not listed on any recognised Stock Exchange, then issue of the Sweat
Equity Snares shall be in accordance with the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.

Procedure to Issue Sweat Equity Shares (in case of unlisted companies) [Section 79A]
1. The issue of sweat equity must be authorized by Articles of Association.
2. Convene a Board Meeting after giving notice to the directors of the company as per section 286 to consider
the proposal of issue of Sweat Equity Shares and to fix up the date, time, place and agenda for the General
Meeting and to pass an Special Resolution for the same. (for specimen of the board resolution, see Annexure
XIV)
3. Issue notices in writing at least twenty one days before the date of the meeting for the General Meeting with
suitable explanatory statement.
4. Explanatory statement annexed to the Special Resolution should contain particulars:
(i) the date of the meeting at which the proposal for issue of sweat equity shares was approved by the
Board of Directors of the company;
(ii) the reasons/justification for the issue;
(iii) the number of shares, consideration for such shares and the class or classes of persons to whom such
equity shares are to be issued;
(iv) the value of the sweat equity shares alongwith valuation report/basis of valuation and the price at which
the sweat equity shares will be issued;
(v) the names of persons to whom the equity will be issued and the persons relationship with the company;
(vi) ceiling on managerial remuneration, if any, which will be affected by issuance of such equity;
(vii) a statement to the effect that the company shall conform to the accounting policies specified by the
Central Government; and
(viii) diluted earning per share pursuant to the issue of securities to be calculated in accordance with the
Accounting Standards issued by ICAI.
5. Hold the General Meeting and pass the Special Resolution by three-fourths majority.
6. Approval of shareholders by way of separate resolution in the general meeting shall be obtained by the
company in case of grant of shares to identified employees and promoters, during any one year, equal to or
exceeding 1% of the issued capital (excluding outstanding warrants and conversion) of the company at the time
of grant of the sweat equity shares.
7. File copies of Special resolution with explanatory statement with the concerned ROC in e-form 23 within 30
days of its passing with requisite filing fees electronically. This e-form has to be digitally signed by the managing
director or director or manager or secretary of the company. The e-form should be pre-certified by a company
126 PP-ACL&P

secretary (in whole-time practice) or chartered accountant (in whole-time practice) or cost accountant (in whole-
time practice) by digitally signing the e-Form.
8. A Board resolution should be passed for allotment of sweat equity shares and for complying with other
formalities therein like filing of e-form 2 etc.
9. Maintain a Register of Sweat Equity Shares in the form specified in Schedule annexed to the Unlisted Companies
(Issue of Sweat Equity Shares) Rules, 2003.
10. The company should not issue sweat equity shares for more than 15% of total paid up equity share capital
in a year or shares of the value of ` 5 crores, whichever is higher, except with the prior approval of the Central
Government.
11. The following details of issue of sweat equity shares are required to be disclosed either in the Directors
Report or in the annexure to the Directors Report,:
(a) Number of shares to be issued to the employees or the directors;
(b) conditions for issue of sweat equity shares;
(c) the pricing formula;
(d) the total number of shares arising as a result of issue of sweat equity shares;
(e) money realised or benefit accrued to the company from the issue of sweat equity shares;
(f) diluted Earnings Per Shares (EPS) pursuant to issuance of sweat equity shares.
12. The price of sweat equity shares to be issued to employees and directors shall be at a fair price calculated
by an independent valuer.
13. If the company proposes to issue sweat equity shares for consideration other than cash, it shall comply with
following :
(a) The valuation of the intellectual property or of the know-how provided or other value addition to
consideration at which sweat equity capital is issued, shall be carried out by a valuer;
(b) the valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and
the nature of the property or the value addition;
(c) the valuer shall submit a valuation report to the company giving justification for the valuation;
(d) a copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the
general meeting;
(e) the company shall give justification for issue of sweat equity shares for consideration other than cash,
which shall form part of the notice sent for the general meeting; and
(f) the amount of Sweat Equity shares issued shall be treated as part of managerial remuneration for the
purposes of sections 198, 309, 310, 311 and 387 of the Companies Act, 1956 if the following conditions
are fulfilled:
(i) the Sweat Equity shares are issued to any director or manager; and
(ii) they are issued for non-cash consideration, which does not take the form of an asset which can be
carried to the balance sheet of the company in accordance with the relevant accounting standards.
14. There shall be lock-in for a period of 3 years from the date of allotment of sweat equity shares issued to
employees or directors.
15. A certificate is required to be placed at the annual general meeting from the auditors of the company or from
Lesson 3 Issue of Securities 127

a practising company secretary stating that sweat equity shares have been allotted in accordance with the
resolution of the company in the general meeting and the said Rules.
16. Keep in mind that-
(i) Where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration
shall be treated in the following manner in the books of account of the company:
(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be
carried to the balance sheet of the company in accordance with the relevant accounting standards;
or
(b) where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting
standards.
(ii) In respect of sweat equity shares issued during accounting period, the accounting value of sweat equity
shares shall be treated as another form of compensation to the employee or the director in the financial
statement of the company.

12. ISSUE AND REDEMPTION OF PREFERENCE SHARES


Section 80 of the Companies Act enables a company limited by shares to issue redeemable preference
shares, if so authorised by the articles of association of the company. Preference shares can be either cumulative
or non-cumulative. A Redeemable preference share is one of the types of preference shares. To redeem
means to buy or pay off; clear by payment; to buy-back. These shares are issued subject to the condition that
they will or may be redeemed, that is, bought back (at the option of the shareholder or the company) by the
company.
Redemption of redeemable preference shares does not amount to reduction of share capital. A company can
issue redeemable preference shares with tenure of not exceeding 20 years. No company can issue irredeemable
preference shares.
The articles must authorize the company to issue redeemable preference shares. If the articles do not contain a
regulation authorising the issue of such shares, then for issuing such shares, articles must be amended to insert
therein a provision authorising the company to issue such shares.
The redemption of redeemable preference shares may be affected on such terms and in such manner as
provided in the articles of the company. If the articles do not contain any provisions in this regard, the terms and
conditions for redemption may be inserted in the articles by amending the articles by a special resolution. The
following conditions must be fulfilled for redemption of redeemable preference shares:
The shares to be redeemed must be fully paid up;
Redemption can be effected only out of profits which would otherwise have been available for dividend,
or out of the proceeds of a fresh issue of shares made for the purpose of redemption;
The premium payable, if any, on the redemption shall be provided for out of the profits of the company
or out of the companys securities premium account. Such provision shall be made before the shares
are redeemed;
If the redemption is out of the proceeds of a fresh issue of shares, the issue shall have been made
specifically or inter-alia for the purpose of the redemption;
If the redemption is out of distributable profits, the profits equivalent to the nominal amount of the shares
redeemed must be transferred to capital redemption reserve account.
Unless the terms of the issue provide for conversion of preference shares into equity shares, the preference
shares have to be redeemed only in cash.
128 PP-ACL&P

The sanction of the court under section 100 of the Act would be necessary where preference shares are to be
redeemed out of capital redemption reserve account created out of the profits of the company.
Two independent procedures are available to a company for redemption of preference shares. It may redeem
the shares by following the procedure laid down under section 80 of the Act which is a special provision meant
for redemption of preference shares or it may take recourse to the general provision under section 100 of the Act
which is applicable for reduction of any capital including preference capital, in any manner. [Birla Global Finance,
in re (2005) 126 Com Cases 647 (Bom)]

Procedure to issue Redeemable Preference Shares Under Section 80


1. Articles of Association of the Company must authorise issue of redeemable preference shares; if not, steps
should be taken to alter them accordingly.
2. Obtain credit rating from any of the approved credit rating agencies (applicable for listed companies)
3. Call a Board Meeting by giving notice to all the directors of the company as per section 286 and take the
decision of issuing redeemable preference shares and fix up the date, time, place and agenda for calling a
General Meeting to pass an Ordinary Resolution (Special Resolution, if the Articles so require) for such issue.
(for specimen of the board resolution, see Annexure XV)
4. Ensure that the issue is such that it is redeemable within 20 years from the date of issue. [Section 80(5A)]
5. Issue notices in writing at least twenty-one days before the date of the General Meeting proposing the resolution
with suitable Explanatory Statement.
6. Inform the Stock Exchange at which the securities of the Company are listed about such proposed issue of
redeemable preference shares.
7. Hold the General Meeting and pass the resolution (if it is made on private placement basis, pass special
resolution under section 81(1A) ) and if the issue is made on right basis, comply with section 81(1). [for specimen
of the resolution, see Annexure XVI]
8. If the resolution passed is a Special Resolution, file the same with the ROC in e-Form No. 23 within thirty days
of its passing with requisite filing fees electronically.
9. If the issue of redeemable preference shares is to be made by issue of Prospectus, then prepare a draft
Prospectus in consultation with the Lead Manager responsible for such drafting. Follow the procedure for Public
Issue of Shares.
10. Make allotment by passing a resolution at a duly convened Board Meeting.
11. File a return of allotment in e-form 2 with ROC.

Procedure to redeem Redeemable Preference Shares


1. Preference shares must be fully paid-up. The premium, if any, on such redemption, must be provided out of
the profits or out of the security premium account of the company, before the shares are redeemed.
2. If these are redeemed out of distributable profits of the company, then, before such redemption, transfer a
sum equal to the nominal amount of shares to be so redeemed to a reserve fund called the Capital Redemption
Reserve Account from the distributable profits of the company.
3. Hold a Board Meeting by giving notice to all the directors of the company as per section 286. Decide about the
number of preference shares to be redeemed, and the date of such redemption. Pass a resolution approving the
redemption of redeemable preference shares.
4. If the redemption is to be made out of the proceeds of a fresh issue of shares, then:
Lesson 3 Issue of Securities 129

(i) Hold a Board Meeting by giving notice to all the directors of the company as per section 286 and
approve the issue of fresh shares up to the nominal amount of the shares to be redeemed by passing a
resolution; (For specimen of Board Resolution see Annexure XVII)
(ii) Pass another resolution approving the redemption of preference shares out of the proceeds of a fresh
issue of shares;
(iii) Pass another Board resolution to issue fresh shares to the existing shareholders;
(iv) Redeem the preference shares within one month of the issue of new shares. [Section 80 (4), proviso]
5. Carry out the redemption of preference shares in both the cases on such terms and in such manner as
provided in the Articles of the company. [Section 80 (2)]
6. If the articles are silent on this aspect, then follow Regulation 2 of Table A of Schedule I to the Act.
7. If the companys shares are listed on a recognized Stock Exchange, inform it about such redemption at least
21 days in advance and forward a copy of the Board resolution to them.
8. Inform the preference shareholders individually and also through a public notice in the newspapers about the
proposed redemption.

ANNEXURES
ANNEXURE I
BOARD RESOLUTION REGARDING ISSUE OF SHARES AT A DISCOUNT
RESOLVED THAT
(a) subject to the approval of the Company at a general meeting by an ordinary resolution, of the Company
Law Board and such other approvals as may be necessary, the Board of Directors of the Company be
and is hereby authorized to issue 5,00,000 (Five Lakh) equity shares of ` 10 (Rupees Ten) each out of
the unissued share capital of the company at a discount not exceeding ` 3 per share i.e. 30 per cent or
such other lesser discount as may be approved by the Company in general meeting or by the Company
Law Board;
(b) an extraordinary general meeting of the Company be convened on ..... [date], at ..... [time] ....., at .....
[place] ..... to transact the business set out in the draft notice produced to this meeting and the Company
Secretary be and is hereby authorised to issue the notice to the members of the Company;
(c) the Company Secretary be and is hereby authorised to make a petition to the Company Law Board,
........ Region Bench, for its approval to the issue of shares at a discount as aforesaid and to do such
other acts, things and deeds as may be necessary or expedient to do to implement this resolution.
ANNEXURE II
ORDINARY RESOLUTION TO BE PASSED AT A GENERAL MEETING REGARDING ISSUE OF SHARES
AT A DISCOUNT
RESOLVED THAT in accordance with Section 79 of the Companies Act, 1956 and subject to the approval of the
Company Law Board, the Board of Directors be and is hereby authorised to issue 5,00,000 (Five Lakh) equity
shares of ` 10 (Rupees Ten) each in the capital of the company at a discount not exceeding ` 3 per share i.e. 30
per cent or such other lesser discount as may be approved by the Company Law Board.
RESOLVED FURTHER THAT the Board of Directors of the company be and is hereby authorized to do all such
acts, deeds or things which may be required to give effect to this resolution.
130 PP-ACL&P

ANNEXURE III
SPECIMEN OF BOARD RESOLUTION FOR ISSUE OF SHARES AT A PREMIUM UNDER SECTION
78(2)(A)
RESOLVED THAT pursuant to section 78 of the Companies Act, 1956 and subject to such modifications and
conditions as the Securities and Exchange Board of India may impose, the Directors of the Company be and
are, hereby authorised to issue 100,00,000 (One Crore) equity shares of ` 5/- each at such premium not
exceeding ` 80/- per share in consultation with the lead managers to the issue.
RESOLVED FURTHER THAT that pursuant to the provisions of section 78 of the Companies Act, 1956, the
sum of ` 4 lakhs being the aggregate amount of the premium received on the issue and allotment of 5,00,000
(Five Lakh) equity shares of ` 10/- (Rupees Ten) each be and is hereby transferred to the Share Premium
Account of the Company maintained with the State Bank of India, Sansad Marg, New Delhi.
ANNEXURE IV
SPECIMEN BOARD RESOLUTION FOR MAKING CALLS ON SHARES
RESOLVED THAT the first and final call of ` 5/- per share of the Company be made upon 2,50,000 (Two
Lakh) equity shares of ` 10/- (Rupees Ten) each and that the said call be made payable on or before 31st
July, 2013.
RESOLVED FURTHER THAT the Indian Overseas Bank, Mumbai having their main offices at Agra,
Ahmedabad, Allahabad, Bangalore, Baroda, Calcutta, Chandigarh, Dehradun, Kanpur, Hyderabad, Lucknow,
Chennai, Nagpur and New Delhi and State Bank of India having their main offices at Indore and Ghaziabad
be and are hereby appointed as bankers of the Company for the purpose of collection of allotment and call
moneys on the aforesaid shares.
RESOLVED FURTHER THAT Industrial Investment Trust Limited, Mumbai, Companys Issue House be and
are hereby authorised to issue call notices on behalf of the Company.
RESOLVED FURTHER THAT the aforesaid accounts be and are hereby operated on behalf of the Company
by Shri SKM Managing Director of the Company.
ANNEXURE V
SPECIMEN OF BOARD RESOLUTION FOR FURTHER ISSUE OF CAPITAL
RESOLVED THAT in terms of section 81(1A) and other applicable provisions, if any, of the Companies Act,
1956 and in accordance with the provisions of Articles of Association of the Company and subject to the
consent of the Securities and Exchange Board of India (SEBI) and all other concerned authorities and
Departments, if and to the extent necessary, and such other approvals, permissions and sanctions as may be
necessary and subject to such conditions and modifications as may be prescribed in granting such approvals,
permissions and sanctions which may be agreed to by the Board of Directors of the Company (hereinafter
referred to as The Board which term shall be deemed to include any committee of the Board), at its sole
discretion, the consent of the company be and is hereby accorded to the Board to create, offer and issue to
such persons as are set out hereunder, such number of equity shares of the company of the face value of
` 10/- each not exceeding in number may be required for subscription for cash at such premium per share as
may be fixed and determined by the Board prior to the issue and offer thereof to such category of persons in
consultation with SEBI or such other Authorities as may be prescribed or in accordance with such guidelines
or other provisions of law as may be prevailing at that time and otherwise earning pari passu except for
payment of dividend pro rata from the date of allotment with the equity shares of the Company as then issued
and to retain oversubscription, if any, in respect of such issue to such extent, as may be then permissible, and
at such time or times as the Board at its absolute discretion and in the best interest of the company may deem
fit:
Lesson 3 Issue of Securities 131

(i) the public such number of equity shares of ` 10/-each as the Board may decide on such terms and
conditions as may be decided by the Board in this respect;
(ii) the permanent employees of the Company (including any Indian Working Directors) on an equitable
basis such number of equity shares of ` 10/- each as would not exceed ten per cent of the number of
equity shares and with such conditions of non-transferability lock-in-period as may be specified in the
prevailing regulations and with the provisions that any unsubscribed portion from such category shall
not lapse but shall at the absolute discretion of the Board be available for allotment by offering the same
to Mutual Funds, Banks, financial institutions or Business Associates or any other person as the Board
may deem fit and thereafter for meeting any oversubscription in the category referred to in (i) above;
and
(iii) the promoters, directors and their relatives and friends, such number of equity shares of ` 10/- each with
such minimum subscription and with such conditions of non-transferability guidelines lock-in-period as
may be specified in the then prevailing regulations
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution the Board of Directors of the
company be and is hereby authorised to take such steps and to do all such acts, deeds, matters and things
and accept any alterations or modification(s) as they may deem fit and proper and give such directions as
may be necessary to settle any question or difficulty that may arise in regard to the issue and allotment of the
said equity shares including the power to allot the unsubscribed equity shares, if any, in such manner as may
appear to the Board of Directors to be most beneficial to the Company.
ANNEXURE VI
SPECIMEN RESOLUTION TO BE PASSED AT THE BOARD MEETING
FOR ISSUE OF BONUS SHARES UNDER SECTION 81 OF
THE COMPANIES ACT, 1956
RESOLVED THAT pursuant to Article. of the Articles of Association of the Company and subject
to the consent of the members in general meeting, and in accordance with the guidelines of the Securities
and Exchange Board of India, the Board of Directors of the Company do hereby recommend that a sum of `
. be capitalised out of general reserve and set free for distribution amongst the equity shareholders
by issue of. equity shares of ` 10/- each credited as fully paid to the equity
shareholders in the proportion of equity share for every. equity
shares held by them on the record date to be decided by the Board and that such new shares, as and when
issued and fully paid, shall rank pari passu with the existing equity shares.
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, an Extraordinary General
Meeting of members of the Company be convened on 30th July, 2013 at 3 P.M. at the registered office of the
company to consider the proposed capitalisation of profits and issue of bonus shares and that the secretary
of the Company be and is hereby authorised to issue notice of the said meeting to the shareholders alongwith
relevant explanatory statement as per drafts thereof submitted to this meeting and initialled by the Chairman
for the purpose of identification.
ANNEXURE VII
SPECIMEN RESOLUTION TO BE PASSED AT A GENERAL MEETING OF A
LISTED COMPANY FOR APPROVAL TO BONUS ISSUE
Subject to the guidelines issued by the Securities and Exchange Board of India and subject to the Foreign
Exchange Management Act, 1999 for allotment and issue of new equity shares to the non-resident members
and subject to the consents of financial institutions, as may be applicable, and also subject to such terms,
conditions, alterations, modifications, changes and variations as may be specified while according such approval
which the Board of Directors of the company (the Board), is authorised to accept, if it thinks fit, the Company
132 PP-ACL&P

approves capitalization the entire amount standing to the credit of General Reserve and...... Reserve and part of
the amount standing to the credit of Share Premium Account in the books of the company as on ..... for an
aggregate amount of ` ..... and such sum be set free for distribution among the holders of existing fully paid
equity shares of ` 10 each of the company, whose names will appear in the register of members of the company
on a date to be decided by the Board in that behalf as Record Date, as an increase of the amount of share
capital of the company held by each such member and not as income or in lieu of dividend credited as....... fully
paid-up equity shares as bonus shares in the proportion of... new equity shares for every.... existing fully paid
equity shares held, subject to the following terms and conditions:
(a) The new equity shares to be allotted as bonus shares will be allotted subject to the terms of the
Memorandum and Articles of Association of the company;
(b) The new equity shares shall rank pari passu in all respects with and carry the same rights as the existing
fully paid-up equity shares of the company and notwithstanding the date or dates of allotment thereof
shall be entitled to participate in full in any dividend to be declared in respect of the financial year in
which the allotment of the new equity shares pursuant to this Resolution is made;
(c) No letter of allotment will be issued by the company in respect of the new equity shares. However, the
equity share certificates in respect thereof will be ready for delivery to the allottees within 3 months from
the date of allotment thereof;
(d) If as a result of implementation of this resolution, any member becomes entitled to a fraction of new
equity shares to be allotted as bonus shares the company shall not issue any certificate or coupon in
respect of such fractional shares but the total number of such new equity shares representing such
fractions shall be allotted by the Board to a nominee to be selected by the Board who would hold them
as trustee for the equity shareholders who would have been entitled to such fractions, in case the same
were issued. Such nominee will as soon as possible sell such equity shares allotted to him at the
prevailing market rate and the net sale proceeds of such shares after adjusting the cost and expenses
in respect thereof be distributed among such members who are entitled to such fractions in the proportion
of their respective holding and allotment of fractions thereof; and
(e) No allotment of bonus shares or distribution of proceeds in respect of fractions to the non-resident
Indian members unless the provisions of the Foreign Exchange Management Act, 1999 have been
complied by the company.
The Company authorizes, for the purpose of giving effect to this resolution, the Board:
(a) to do all such acts, matters and things whatsoever including settling any question, doubt or difficulty that
may arise with regard to or in relation to the issue or allotment of the bonus shares;
(b) to accept on behalf of the company any conditions, modifications relating to the issue of bonus shares
prescribed by the Reserve Bank of India or any other authority and which the Board in its discretion
thinks fit and proper.
ANNEXURE VIII
SPECIMEN RESOLUTION TO BE PASSED AT A GENERAL MEETING OF AN
UNLISTED COMPANY FOR APPROVAL TO BONUS ISSUE
Subject to the Foreign Exchange Management Act, 1999 for allotment and issue of new equity shares to the
non-resident members and subject to the consents of financial institutions, as may be applicable, and also
subject to such terms, conditions, alterations, modifications, changes and variations as may be specified while
according such approval which the Board of Directors of the company (the Board), is authorised to accept, if it
thinks fit, the Company approves capitalization of the entire amount standing to the credit of General Reserve
and...... Reserve and part of the amount standing to the credit of Share Premium Account in the books of the
Lesson 3 Issue of Securities 133

company as on ..... for an aggregate amount of ` ..... and such sum be set free for distribution among the holders
of existing fully paid equity shares of ` 10 each of the company, whose names will appear in the register of
members of the company on a date to be decided by the Board in that behalf, as an increase of the amount of
share capital of the company held by each such member and not as income or in lieu of dividend credited as.......
fully paid-up equity shares as bonus shares in the proportion of... new equity shares for every.... existing fully
paid equity shares held, subject to the following terms and conditions:
(a) The new equity shares to be allotted as bonus shares will be allotted subject to the terms of the
Memorandum and Articles of Association of the company;
(b) The new equity shares shall rank pari passu in all respects with and carry the same rights as the existing
fully paid-up equity shares of the company and notwithstanding the date or dates of allotment thereof
shall be entitled to participate in full in any dividend to be declared in respect of the financial year in
which the allotment of the new equity shares pursuant to this Resolution is made;
(c) No letter of allotment will be issued by the company in respect of the new equity shares. However, the
equity share certificates in respect thereof will be ready for delivery to the allottees within 3 months from
the date of allotment thereof;
(d) If as a result of implementation of this resolution, any member becomes entitled to a fraction of new
equity shares to be allotted as bonus shares the company shall not issue any certificate or coupon in
respect of such fractional shares but the total number of such new equity shares representing such
fractions shall be allotted by the Board to a nominee to be selected by the Board who would hold them
as trustee for the equity shareholders who would have been entitled to such fractions, in case the same
were issued. Such nominee will as soon as possible sell such equity shares allotted to him at the
prevailing market rate and the net sale proceeds of such shares after adjusting the cost and expenses
in respect thereof be distributed among such members who are entitled to such fractions in the proportion
of their respective holding and allotment of fractions thereof; and
(e) No allotment of bonus shares or distribution of proceeds in respect of fractions to the non-resident
Indian members unless the provisions of the Foreign Exchange Management Act, 1999 have been
complied by the company.
The Company authorizes, for the purpose of giving effect to this resolution, the Board:
(a) to do all such acts, matters and things whatsoever including settling any question, doubt or difficulty that
may arise with regard to or in relation to the issue or allotment of the bonus shares;
(b) to accept on behalf of the company any conditions, modifications relating to the issue of bonus shares
prescribed by the Reserve Bank of India or any other authority and which the Board in its discretion
thinks fit and proper.
ANNEXURE IX
SPECIMEN OF BOARD RESOLUTION FOR ISSUE OF SHARES
WITH DIFFERENTIAL VOTING RIGHTS
RESOLVED THAT pursuant to section 86(a)(ii) of the Companies Act, 1956 read with Article . of the
Articles of Association of the Company and subject to the consent of the members of the Company in general
meeting, and in accordance with the Rules, Regulations, or Guidelines made therefor, approval be and is
hereby accorded for the issue of 10,00,000 equity shares of ` 10 each at par aggregating to ` 1 crore
containing differential voting rights as follows:-
1. The shares proposed to be issued shall have voting rights equivalent to 50% of such rights available to
other shareholders.
134 PP-ACL&P

2. The shares proposed to be issued will be entitled to dividend at the rate of 200% of the dividends
declared to other shareholders
3. The company shall not convert its existing equity share capital with voting rights into equity shares with
differential voting rights.
4. The shares proposed to be issued with differential voting rights shall not be converted into equity shares
with voting rights.
5. The shares proposed to be issued with differential voting rights shall be entitled to bonus shares, right
shares etc. of the same class at 50% of equity shares.
6. Subject to the above, the shareholders with differential voting rights shall enjoy all other rights a
shareholder is entitled to
RESOLVED FURTHER THAT Clause V of the Memorandum of Association be altered as under:-
V. The Authorised Share Capital of the company shall consist of 100,00,000 equity shares of ` 10 each
aggregating to ` 10 crores and 10,00,000 equity shares of ` 10 each at par aggregating to ` 1 crore containing
differential rights as to dividend and voting as may be decided by the company from time to time.
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, an Extraordinary General
Meeting of the members of the Company be convened to secure the approval of members in this regard and
that the secretary of the company be and is hereby authorised to issue the notice of the said meeting to the
members with the relevant explanatory statement as per the drafts placed before this meeting and intialled by
the chairman for the purpose of identification.
RESOLVED FURTHER THAT secretary be also authorised to affix his digital signature and file e-form 2 and
comply with all other formalities in this regard.
ANNEXURE X
SPECIAL RESOLUTION TO ALTER ARTICLES OF ASSOCIATION OF THE COMPANY TO
PROVIDE FOR EMPLOYEES STOCK OPTION
RESOLVED THAT pursuant to section 31 and other applicable provisions, if any, of the Companies Act,
1956, the Articles of Association of the Company be and are hereby altered in the following manner:
That the following new Article be immediately after Article ..
Provisions for Employees Stock Option:
Subject to the provisions of section 81(1A) and other applicable provisions, if any, of the Act and subject to the
Articles of Association, the Board may, from time to time, create, offer and issue to or for the benefit of the
Companys employees including the Executive chairman, the Managing Directors and the Whole time Directors
such number of equity shares of the Company of the face value of ` 10 each not exceeding in number at any
time in the aggregate .... % of the capital after expansion, for subscription on such terms and conditions as
may be determined by the Board prior to the issue and offer, in consultation with the authorities concerned
and in accordance with such guidelines or other provisions of law as may be prevalent at that time but ranking
pari passu with the existing equity shares of the Company:
1. The issue price of such shares shall be determined by the Board in accordance with the laws prevalent
at the time of the issue.
2. In the alternative to equity shares, mentioned hereinabove, the Board may also issue bonds, equity
warrants or other securities convertible or non-convertible into equity shares, as may be permitted in
law, from time to time.
Lesson 3 Issue of Securities 135

All such issues as above are to be made in pursuance of Employees Stock Option (ESOP) Scheme to be
drawn up and approved by the Board.
ANNEXURE XI
BOARD RESOLUTION FOR CONSTITUTING COMPENSATION COMMITTEE
RESOLVED THAT the Compensation Committee be constituted as under:
1. ..Director
2. Director
3. Director
4. ..Director
RESOLVED FURTHER THAT the said Committee shall appoint its Chairman and perform the following
functions:
(a) to formulate and recommend to the Board, from time to time, compensation structure for the whole-time
members of the Board;
(b) to formulate, from time to time, an Employee Stock Option Scheme for the employees of the company
and its associate companies; and
(c) to decide the terms and conditions of the Scheme.
ANNEXURE XII
MODEL EMPLOYEES STOCK OPTION SCHEME
...................... LIMITED
THE EMPLOYEES STOCK OPTION (ESOP)
1. Introduction. This document sets out the terms and conditions of the ESOP the duties and responsibilities of
the awardee as also the benefits and the procedures to be followed.
2. Objective of the ESOP. The purpose of this ESOP is to provide an ongoing mechanism for rewarding Executives
of .............................. Limited (hereinafter referred as the Company) for their continued and valuable services
and the ESOP is merit for a selected category of employees of the Company as decided from time to time by the
management of the Company. The ESOP has been so designed as to reward continued association of an
individual with the Company for the given future period. The ESOP will be implemented on a yearly basis.
3. Administration of the ESOP. The Company would create an Employees Welfare Trust for implementing the
ESOP and allot to the trust ............... equity shares so as to constitute ........... % of the post issue paid up Equity
Share Capital. The Trust in turn has a right to issue warrant to the employees of the Company. Each warrant
carries with it the right to apply for and be allotted one equity share of, the Company at the exercise price. The
trust is to hold the Warrants for and on behalf of the employees and transfer the same to them as and when
advised. The Company has constituted a Compensation Committee to choose eligible employees for grant of
warrants. The trust would issue warrants to the employees on the basis of the advise of the Compensation
Committee.
4. Employees. Only bona fide full time employees of the Company in confirmed service are eligible under this
ESOP. The selection shall be based upon the performance appraisal, minimum period of services the status of
the employees in the Company and the present and potential, contribution, of the employee to the success, of
the Company and other factor deemed relevant by the Compensation Committee. The promoter directors are
not eligible to participate in this ESOP.
136 PP-ACL&P

At the discretion of the Board of directors of the Company, employees of the holding Company/subsidiary Company
may also be deemed to be employees for the purpose of this ESOP.
5. Government regulations. This ESOP shall be subject to all applicable laws, rules, regulations and to such
approvals by any governmental agencies as may be required. The grant of warrants/shares under this ESOP
shall entitle the company to require the employee to comply with such requirements of law or, may be necessary
in the opinion of the Company.
6. General risks. Participation, in this ESOP shall not be construed as any guarantee of return on the equity
investment. Any loss due to this investment and the risks associated with the investment are that of the employee
alone.
7. Warrants
7.1 Issue of Warrants:
(a) The warrants shall be issued to the employees in lots of 100 in consideration of the payment to the trust
of a sum of ` 1/- per warrant or such other sum as the trust may, decide from time to time. Such transfer
shall be made upon the specific recommendation of the Compensation Committee.
(b) The warrant shall not be Transferable by the employee except back to the trust on the happening of
certain events as mentioned in the following clauses 7.1(c) and 7.1(d).
(c) In the event of the employee ceasing to be an employee of the Company by reason of resignation,
dismissal or severance of employment due to reasons of non-performance or otherwise the warrants
held by the employee shall forthwith be caused to be transferred to the trust at the same consideration
as mentioned in Clause 7.1(a).
(d) In the event of the employee dying in harness or attaining the age of superannuation while in service the
rights and obligations under the warrants shall accrue to his legal heirs or continue in his hands as the
case may be.
7.2 Exercise of Warrant. Each warrant entitles the holder thereof to apply for and be allotted one equity share
of the nominal value of each on the payment of the exercise price at any time during the exercise period.
7.3 Exercise Price. The exercise price of the warrant shall be declared at the time of issue of such warrant.
7.4 Exercise Period:
(a) The option to apply for conversion of the warrants shall be exercisable as per a vesting schedule as
follows:
On Completion of months from the date of the issue of the warrants: one-third;
On Completion of months from the date of issue the warrants: one-third;
On Completion of months from the date of issue the warrants: last one-third;
On Vesting, the option will have to be exercised within one month of the vesting.
(b) In case the warrants are not exercised by the employee within the exercise period they will lapse and no
rights will accrue after that date. The amount paid on the warrant of ` 1/- shall in that event be forfeited
by the company.
(c) The employee can opt for conversion of his warrants on the exercise date by applying to the Companys
Employees Welfare Trust.
7.5 Bonus Issue. In the event of a bonus issue of securities being made by the Company during the period of
issue of the warrants and exercise of the option by the warrant holders, the holder of the warrant would be
entitled to apply for and be allotted proportionately higher number of shares for each warrant held.
Lesson 3 Issue of Securities 137

7.6 Option for Conversion


(a) The warrant holder may at his discretion opt for conversion during the exercise period on the exercise
date of all the warrants that he has some of the warrants.
(b) However, the exercise shall be made in lots of 100 warrants each.
7.7 Transfer of Warrants
(a) The warrants held by the employee are not transferable except to the trust during the life of the warrant.
During this period the said warrants cannot be pledged/ hypothecated/charged/mortgaged/assigned or
in any other manner alienated or disposed off.
(b) However, on the happening of any of the events mentioned in clause 7.1(c) the employee shall forthwith
transfer/cause to be transferred all the warrants held by him back to the trust.
The employee shall enter into a specific agreement with the trust for the purpose.
7.8 Safe Custody
(a) The employee in whose name the warrants are transferred by the trust shall enter into an agreement
with the trust for keeping these warrants in the safe custody of the trust during the life of the warrant.
(b) At the end of every financial year during the period of custody the Trust shall issue a statement showing
the number of warrants held in trust on behalf of the employee.
8. Shares
8.1 Issue of shares. After the warrants are converted into shares, the shares so converted shall be subject to
the terms and conditions as mentioned below.
8.2 Ranking of shares
(a) The shares arising on the conversion of the warrants shall rank pari passu with all the other existing
outstanding equity shares of the Company.
(b) However, any right attached to such shares shall be with reference to a date subsequent to the date of
allotment.
8.3 Loans for purchase of shares. In the event of the employee obtaining loans for the purchase/conversion of
the shares either from the Company or from the trust he shall comply with the terms and conditions of the
agreement granting the loans.
9. Tax liability
(a) In the event of any tax liability arising on account of the issue of the warrants/ conversion into shares/
transfer of shares to the employee the liability shall be that of the employee alone.
(b) In the event of any tax liability arising on account of the ESOP to the trust, it shall have the right to cause
the shares held by the trust under this ESOP to be sold otherwise, alienated to meet the liability on
behalf of the employee.
10. Change in the terms and conditions of the ESOP. The Board of Directors may at any time at its discretion
change the terms and condition of the ESOP. However, the change shall not be to the detriment of the warrant
holder or the employee allotted/ transferred shares under the ESOP.
11. Confidentiality
(a) The employee who holds any warrants/shares under the ESOP, shall not divulge the details of the
ESOP and his holding to any person except with the prior permission of the trust obtained in writing.
138 PP-ACL&P

(b) The employee shall enter into such agreement as the Company/trust may desire from time to time to
more fully and effectively implement this ESOP.
12. Contract of employment
(a) This shall not form part of any contract of employment between the Company and the employee. The
rights and obligations of any individual under the terms of his office or employment with the Company
shall not be affected by his participation in this ESOP or any right which he may have to participate in it.
(b) Nothing in this ESOP shall be construed as affording such an individual any additional rights as to
compensation or damages in consequence of the termination of such office or employment for any
reason.
(c) This ESOP shall not confer on any person any legal or equitable rights against the Company either
directly or indirectly or give rise to any cause of action in law or equity against the Company.
(d) This ESOP is purely at the discretion of the Company.
ANNEXURE XIII
SPECIMEN BOARD RESOLUTION FOR EMPLOYEES STOCK OPTION SCHEME
RESOLVED THAT pursuant to the provisions of Section 79A, 81 of the Companies Act, 1956, and all other applicable
provisions, if any, and subject to the consent of the shareholders in a General Meeting and further subject to
Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999, the Employee Stock Option Scheme/Employee Stock Purchase Scheme as per the draft placed
on the table, which is initiated by the Chairman for the purpose of identification, be and is hereby approved.
RESOLVED FURTHER THAT (Number of) share option (each option conferring on the employee a right to get
one equity share of ` 10 each of the Company) be offered to eligible employees (including Whole-time directors)
of the Company identified from time to time by the Compensation Committee of the Board of Directors, provided
however, that an employee who is a promoter or belongs to the promoter group shall not be eligible to participate
in the abovementioned Scheme.
RESOLVED FURTHER THAT a director who either himself or through his relatives or through any body corporate,
directly or indirectly holds more than 10% of the outstanding equity shares of the company shall also not be
eligible to participate in the Scheme.
RESOLVED FURTHER THAT the share options shall entitle the eligible employees to apply for equity shares at
the market price prevailing on the date of this meeting, i.e., 2013 (Grant Date). The closing market price on the
................................ (Name of Exchange) Stock Exchange on the Grant Date was ` ................... per share.
SPECIAL RESOLUTION FOR EMPLOYEES STOCK OPTION SCHEME
RESOLVED THAT pursuant and subject to section 81 and other applicable provisions, if any, of the Companies
Act, 1956, the relevant Articles of the Articles of Association of the Company and the provisions of the Securities
and Exchange Board of India (Employees Stock Option Scheme and Employees Stock Purchase Scheme)
Guidelines, 1999 (the Guidelines) (including any statutory modification(s) or re-enactment of the Act or the
Guidelines, for the time being in force) and subject to such other approvals, permissions and sanctions as
may be necessary and subject to such conditions and modifications as may be prescribed or imposed while
granting such approvals, permissions and sanctions which may be agreed to by the Board of Directors of the
Company (hereinafter referred to as the Board which term shall be deemed to include any Committee
including ESOP Compensation Committee which the Board may constitute to exercise its powers, including
the powers conferred by this resolution), consent of the Company be and is hereby accorded to the Board to
create, offer, issue and allot at any time to or for the benefit of such person(s) who are in permanent employment
of the Company, including Directors of the Company, whether whole-time or otherwise, under a Scheme titled
Lesson 3 Issue of Securities 139

Employees Stock Option Plan (hereinafter referred to as the ESOP or Scheme or Plan) such number of
equity shares and/or equity linked instruments (including Options), equity shares issued through Global
Depository Receipts (GDRs) and/or any other instruments or securities (hereinafter collectively referred to
as Securities) of the Company which could give rise to the issue of equity shares not exceeding 5% of the
issued Equity Share Capital of the Company on 31st March, 2013, at such price, in one or more branches and
on such terms and conditions as may be fixed or determined by the Board in accordance with the Guidelines
or other provisions of the law or guidelines issued by the relevant Authority or as may be prevailing at that
time.
RESOLVED FURTHER THAT the said Securities may be allotted directly to such employees/directors or in
accordance with a Scheme framed in that behalf through a trust which may be set up by the Board of Directors
in any permissible manner and that the scheme may also envisage for providing any financial assistance to
the trust to enable the employee/trust to acquire, purchase or subscribe to the securities of the Company.
RESOLVED FURTHER THAT the new Equity Shares to be issued and allotted by the Company in the manner
aforesaid shall rank pari passu in all respects with the then existing Equity Shares of the Company except that
they shall be entitled to dividend on pro-rata basis from the date of allotment till the end of the relevant
financial year in which the new Equity Shares are allotted.
RESOLVED FURTHER THAT for the purpose of giving effect to any creation, offer, issue, allotment or listing
of Securities, the Board be and is hereby authorized on behalf of the Company to evolve, decide upon and
bring into effect the Scheme and make any modifications, changes, variations, alterations or revisions in the
said Scheme from time to time or to suspend, withdraw or revive the Scheme from time to time as may be
specified by any statutory authority and to do all such acts, deeds, matters and things as it may in its absolute
discretion deem fit or necessary or desirable for such purpose and with power on behalf of the Company to
settle any questions, difficulties, or doubts that may arise in this regard without requiring the Board to secure
any further consent or approval of the members of the Company.
Explanatory Statement
The Company has drawn a Corporate Plan, which has chalked out the strategy of the Company up to the year
2020 for achieving faster growth in all core areas of its business. In consonance with the said Plan drawn in
2008, the Company in the last 5 years has emerged as a fully integrated and leading power utility. The Company
heavily draws on the dedicated and committed contribution of its sincere team of employees in pursuing growth
with excellence in performance. To motivate the employees and to enable them to participate in the long-term
growth and financial success of the Company, with the common objective of maximizing the shareholder value,
it is proposed to introduce an Employees Stock Option Plan (ESOP). The ESOP would not only enable the
Company to attract and motivate employees by rewarding performance as also retain the best talents but also
enable the employees to develop a sense of ownership with the Company by aligning their interest with that of
the Company and its shareholders.
Recognizing the need to reward the employees through stock options, the Securities and Exchange Board of
India (SEBI) has introduced the SEBI (Employees Stock Option Scheme and Employees Stock Purchase
Scheme) Guidelines, 1999. With greater clarity with regard to taxation of stock options and comprehensive
Guidelines in place, it is proposed to introduce the following stock option scheme for the benefit of the permanent
employees and directors of the Company.
As the Scheme provides for issue of shares to be offered to persons other than existing shareholders of the
company, consent of the members is sought pursuant to the provisions of section 81(1A) and all other applicable
provisions, if any, of the Act, and as per the requirement of Clause 6 of the Guidelines.
None of the Directors of the Company, in any way, concerned or interested in the resolution, except to the extent
of the securities that may be offered to them under the Scheme.
140 PP-ACL&P

Your Directors, therefore, recommend the proposed resolution to be passed as a Special Resolution by the
Members at the forthcoming Annual General Meeting.
ANNEXURE XIV
SPECIMEN OF BOARD RESOLUTION FOR ISSUE OF SWEAT
EQUITY SHARES UNDER SECTION 79A
RESOLOVED THAT subject to the authorisation by the Company in the general meeting and pursuant to section
79A of the Companies Act 1956 number of shares of ` . be and are hereby issued at a discount of 10% to
number of employees a list of which is placed before this meeting and initialled by the Chairman for the purpose
of identification.
RESOLVED FURTHER THAT the said shares be issued in accordance with the Unlisted Companies (Issue of
Sweat Equity Shares) Rules, 2003/SEBI (Issue of Sweat Equity) Regulations, 2002 made in this behalf.
RESOLVED FURTHER THAT an Extraordinary General Meeting of the Company be called and held for the
aforesaid purpose on .. at .. as per the draft notice and the explanatory statement placed before the
meeting and initialled by the Chairman for the purpose of identification.
RESOLVED FURTHER THAT the Secretary of the Company be directed to issue the notice to all the members
of the Company and take every step needed in connection therewith or ancillary or incidental thereto.
ANNEXURE XV
SPECIMEN OF BOARD RESOLUTION FOR ISSUE OF REDEEMABLE PREFERENCE SHARES ON
RIGHTS BASIS
RESOLVED THAT subject to the approval of the Company in general meeting and such other approvals as may
be necessary the company do issue [number] Redeemable Cumulative Preference Shares of ` [face
value of one share] each to be issued in cash at par and offered to the existing equity shareholders in the
proportion of one new Preference Share for every [number] equity shares held.
RESOLVED FURTHER THAT an extraordinary general meeting of the company be held on Tuesday the 3rd
September, 2012 at 11 a.m. at the registered office of the company to secure the approval of members in this
regard.
RESOLVED FURTHER THAT the draft notice of the extraordinary general meeting placed before the meeting
and initialled by the Chairman for the purpose of identification be approved and the Secretary of the company be
authorized to sign and issue the same to all eligible members whose names appear in the register of members.
RESOLVED FURTHER THAT Mr. P, Managing Director be authorized to comply with all the formalities in this
regard.
ANNEXURE XVI
SPECIMEN OF ORDINARY RESOLUTION TO BE PASSED AT A
GENERAL MEETING FOR ISSUE OF REDEEMABLE
PREFERENCE SHARES ON RIGHTS BASIS
RESOLVED THAT
(a) the company do issue ..... [number] ..... Redeemable Cumulative Preference Shares of ` ..... [face value
of one share] ..... each to be issued in cash at par and offered to the existing equity shareholders in the
proportion of one new Preference Share for every ..... [number] ..... equity shares held;
(b) the said Redeemable Cumulative Preference Shares be offered to each equity shareholder whose
Lesson 3 Issue of Securities 141

name appears on the Register of Members of the Company on ..... [date] ..... by a notice specifying the
number of new Preference Shares to which he is entitled with an option to apply for additional new
shares, the allotment of which shall be at the absolute discretion of the Directors and limiting the time
within which the offer if not accepted shall be deemed to be declined and containing such terms as to
payment of the value of the shares as the Directors may determine;
(c) the Directors be and are hereby authorised to allot the said Preference Shares that may be surplus, on
account of no fractional entitlement being given for the said shares as aforesaid and also any of the
Preference Shares offered not taken by the shareholders of the existing equity shares or remaining
undisposed be allotted to the underwriters or disposed off to any other party or parties upon such terms
and conditions and in such manner as the Directors may think fit;
(d) the Preference Shares shall carry a dividend of ...% per annum and the same shall accrue from the date
of allotment thereof to each shareholder.
(e) the company shall be entitled to redeem the said preference shares out of its profits by three equal instalments
commencing from the ...., year.... [the number of the year/s] ..... from the date of issue.
ANNEXURE XVII
SPECIMEN OF BOARD RESOLUTION FOR ISSUE OF NEW REDEEMABLE PREFERENCE SHARES
FOR REDEMPTION OF UNREDEEMED PREFERENCE SHARES
RESOLVED THAT pursuant to section 80 (4) of the Companies Act, 1956, 70,000 ten per cent redeemable
preference shares of ` 100/- each be issued by the Company upon such terms and conditions as are set
out in the statement submitted to this meeting and the proceeds of this new issue be utilised for the
purpose of redeeming the existing 70,000 ten per cent redeemable preference shares of ` 100/- each by
the Company.
RESOLVED FURTHER THAT Mr. P, Managing Director and Mr. Q, Company Secretary be and are
hereby authorized to comply with all the formalities in this regard including affixing digital signatures on e-
forms.

LESSON ROUND-UP
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler.
Public Issue of shares means the selling or marketing of shares for subscription by the public by issue
of prospectus.
Public Issue of shares is regulated by SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009. Public issues can be further classified into Initial Public offerings and further public offerings. In
a public offering, the issuer makes an offer for new investors to enter its shareholding family.
All listed companies whose equity shares are listed on a stock exchange and unlisted companies
eligible to make a public issue and desirous of getting its securities listed on a recognised stock
exchange pursuant to a public issue, may freely price its equity shares or any securities convertible at
a later date into equity shares.
Underwriting means an agreement with or without conditions to subscribe to the securities of a body
corporate when the existing shareholders of such body corporate or the public do not subscribe to the
securities offered to them.
142 PP-ACL&P

A merchant banker holding a valid certificate of registration is required to be appointed to manage the
issue.
When a company issues a share at a price lower than its nominal or par value, the shares are said to
have been issued at a discount. The provisions are contained in Section 79(1).
When shares are issued by a company at a price above their face value (or nominal or par value) then
the shares are said to have been issued at a premium. It is the difference between the price at which
a company issues a share and the face value of a share.
The power to make calls can be exercised only by the Board by means of a resolution passed at a duly
convened Board meeting. The power cannot be delegated to Committee of directors. [Section 292].
Section 81 of the Companies Act contains provisions on further issue of capital, and enacts the
principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the company.
No dividend can be paid by a company except in cash. However, the prohibition against payment of
dividend otherwise than in cash, is not deemed to prohibit the capitalization of profits or reserves.
[Section 205(3)].
There are no guidelines on issuing bonus shares by private or unlisted companies. However, SEBI
has issued guidelines for Bonus Issue which are contained in Chapter IX of SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 with regard to bonus issues by listed companies.
As per section 86(a)(ii), share capital of a company limited by shares can consists of equity share
capital with differential rights as to dividend, voting or otherwise in accordance with the Companies
(Issue of Share Capital with Differential Voting Rights) Rules, 2001.
In case of an unlisted public company, the provisions of Unlisted Public Companies (Preferential
Allotment) Rules, 2003 (as amended by the amendment rules of 2011) are applicable.
If the company is a listed company then the provisions of Chapter VII of the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 are required to be followed in case of preferential allotment.
The term Employee Stock Option (ESOP) has been defined under Sub-section (15A) of Section 2 of
the Companies Act, 1956, according to which employee stock option means the option given to the
whole-time directors, officers or employees of a company, which gives such directors, officers or
employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the
company at a pre-determined price.
The provisions relating to Sweat Equity shares are dealt in section 79A of the Companies Act, 1956. In
respect of the companies which are already listed or those companies which propose to obtain listing,
issue of Sweat Equity Shares is administered by SEBI.
Section 80 of the Companies Act enables a company limited by shares to issue redeemable preference
shares, if so authorised by the articles of association of the company.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Explain the various legal provisions to be complied with for further issue of capital.
2. Write a note on the work involved in making an issue of share open to the public.
3. State the guidelines relating to Issue of Bonus Shares.
4. Write the procedure for preferential allotment of equity shares in case of unlisted public companies.
Lesson 3 Issue of Securities 143

5. Write short notes on


(a) Minimum subscription
(b) Abridged prospectus
(c) Minimum promoters contribution and lock-in-period
(d) Preferential allotment
(e) Employee Stock Option Scheme
(f) Employers Stock Purchase Scheme.
6. Write down the provisions for issue of Sweat Equity Shares.
144 PP-ACL&P
Lesson 4 Allotment of Securities 145

Lesson 4
Allotment of Securities

LESSON OUTLINE
LEARNING OBJECTIVES
Meaning of Allotment of shares
Allotment of shares is the acceptance by the
Different aspects of Allotment of shares company of the offer to take shares by the
applicant. The offer is accepted by the allotment
Allotment procedure either of the total number mentioned in the offer
or a lesser number, to be taken by the person
Making calls on shares who made the offer. This lesson relates to the
allotment of securities. After going through this
Issue of share certificates lesson, you will be able to understand
procedural aspects relating to allotment of
LESSON ROUND UP shares, making calls on shares and issue of
share certificates.
SELF TEST QUESTIONS

145
146 PP-ACL&P

MEANING OF ALLOTMENT
The term allotment has not been defined anywhere in the Companies Act, 1956. Its dictionary meaning is to
distribute or parcel out in parts or portions. Allotment of shares means division, distribution or appropriation of
shares in a company. It is a method of distributing previously unissued shares in a company having a share
capital from out of the authorised share capital in exchange for a contribution of capital, in response to an
application for such shares.
Allotment is the process by which title to the shares of the company is conferred upon the investor who has
agreed to subscribe to the shares of the company. It is the act of accepting the offer made by the subscriber/
investor or to make investment in the company and participate in its ownership.
As per Section 581ZB of the Act, a Producer companys share capital shall consist of equity shares only and the
shares held by members shall be in proportion to the patronage of that company.
In Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association (1963) 33 Com Cases 862: AIR 1964 SC
250, the Supreme Court held that allotment means the appropriation out of the previously unappropriated
share capital of a company, of a certain number of shares to a certain person. Till such allotment, the shares do
not exist as such. It is on allotment in this sense that the shares come into existence.
Allotment is the acceptance by the company of the offer to take shares by the applicant. The offer is accepted by
the allotment either of the total number mentioned in the offer or a lesser number, to be taken by the person who
made the offer. This constitutes a binding contract between the company and the member according to the offer
and acceptance.
Under the Companies Act, a company having a share capital is required to state in its memorandum of association
the amount of the capital and the division thereof into shares of a fixed amount. This is what is called the
authorised capital of the company. Then the company proceeds to issue the shares depending on the condition
of the market. This means inviting applications for these shares. When the applications are received, it accepts
them and this is what is generally called allotment. The company accepts the application by allotting the shares
in full or in part. Then it communicates to the allottee by dispatching a letter of allotment to the applicant stating
how many shares he has been allotted; he then has an unconditional right to be entered in the register of
members in respect of those shares. If the number of shares applied for exceeds the number available
(oversubscription), allotment is made by a random draw or by a proportional allocation. If an applicant has been
allotted fewer shares than he has applied for, he receives a cheque or warrant for the refund of the application
money in respect of the unallotted balance. In case of listed companies, the process of allotment is governed by
SEBI Regulations/Guidelines. In the case of unlisted companies and private companies, allotment is governed
by the provisions contained in the Articles of Association.

ALLOTMENT OF SHARES
Sub-section (3A) of Section 73 directs that application money standing to the credit of the separate bank account
shall not be utilised for any purpose other than the following purposes, namely:
(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the
stock exchange(s) specified in the prospectus; or
(b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not
been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus,
as the case may be, or, where the company is for any other reason unable to make the allotment of
shares.
Section 75(1) makes it obligatory on the part of every company allotting shares to file with the concerned
Lesson 4 Allotment of Securities 147

Registrar of Companies, return of allotment of the shares within thirty days of the allotment along with the
prescribed filing fee. The return should not show any shares as having been allotted for cash if cash has not
actually been received in respect of such allotment. The return of allotment of shares is required to be sent in e-
form 2 as prescribed in the Companies (Central Governments) General Rules and Forms (Amendment) Rules,
2006 along with the prescribed filing fee (For specimen of e-form 2, please refer the CD provided along with the
Study Material or see the link http://www.mca.gov.in/MCA21/Download_eForm_choose.html)

Shares Allotted for Consideration otherwise than in Cash


Sub-section (2) of Section 75 lays down that in the case of shares allotted as fully or partly paid up otherwise
than in cash, the company is required to produce before the ROC for inspection and examination, a contract in
writing constituting the title of the allottee to the allotment together with any contract of sale or a contact for
services or other consideration in respect of which that allotment was made. The company is required to file
along with the return of allotment, copies of such contracts verified by an affidavit of a responsible officer of the
company stating that they are true copies, as prescribed in Rule 5 of the Companies (Central Governments)
General Rules and Forms, 1956. If the contracts are not reduced in writing, prescribed particulars of contract in
e-form 3 duly stamped with stamp duty which would have been paid, had the contract been reduced to writing
along with copy of board resolution approving allotment of shares otherwise than in cash are to be filed with the
ROC within 30 days of the allotment.
(For specimen of e-form 3, please refer the CD provided along with the Study Material or see the link http://
www.mca.gov.in/MCA21/Download_eForm_choose.html)

Return of Allotment of Bonus Shares


In the case of allotment of bonus shares, the company is required to attach to the return of allotment, a certified
copy of the ordinary resolution of the general meeting authorising the issue of such shares. [Refer Section
75(a)(c)(i)].

Return of Allotment of Shares Issued at Discount


The company is required to attach to the return of allotment, a certified copy of the resolution passed by the
company for the issue of shares at a discount together with a copy of the order of the Company Law Board*
sanctioning the issue and where the minimum rate of discount exceeds ten percent, a copy of the order of the
Central Government permitting the issue at a higher percentage.

Disposal of Forfeited Shares No Allotment Return to be Filed


According to Section 75(1) of the Companies Act, a company is required to file a return of allotment of shares and not
for re-issue of forfeited shares. Allotment, as we have seen above, is appropriation of the previously unappropriated
capital of a company, of a certain number of shares to a certain person. Till such allotment, the shares do not exist as
such. However, in the case of forfeited shares, they had already been allotted and they had come into existence at the
time of their allotment and their forfeiture is a proof of their existence. Therefore, no return of allotment is required to
be filed with the ROC by a company at the time of re-issue or disposal of forfeited shares [Sri Gopal Jalan and Co. v.
Calcutta Stock Exchange Association (1963) 33 Com Cases 862: AIR 1964 SC 250].

Return of Allotment to be Filed in Respect of Every Allotment


The duty of a company to file a return of allotment is not confined to the first allotment. The company has to file
the return of allotment whenever it makes any allotment of shares. The Calcutta High Court expressed the
opinion that non-filing of the return will not make the allotment of shares to be bad. [Gobind Pritamadas Malkani
vs. Amarendra Nath Sircar, 1980 50 Com Cases 219, 236 (Cal).]

* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come into effect.
148 PP-ACL&P

Allotment of Fractional Shares


The issue of coupons for fractional shares cannot be said to be allotment of any shares till the holders are issued
letter of allotment in respect of any shares from the company in their names in exchange of the coupons. Any
dividend declared in the meantime in respect of the capital represented by such coupons should not be treated
as dividend declared in favour of any particular holder of a share as such, but dividend is kept earmarked for
whoever may be allotted full shares in exchange of the coupons (Departments clarification vide F.No. 8/31(75)63-
PR dated 27th March, 1963).

Share Application Form


The process of allotment of shares or debentures in a company commences with an application, which is an
offer made by a prospective investor to the company to accept the shares of the company. Section 41(2) of the
Act provides that every person (other than the subscriber to the Memorandum) shall agree in writing to become
a member. The company may or may not accept the offer, which means that the company has the discretion to
accept in full or in part or to reject in toto, the offer of the applicant or the offeror. The offeror may revoke his offer
till it is accepted by the company, i.e. till the shares are allotted in response to the offer.
Sub-section (3) of Section 56 of the Companies Act, 1956 lays down that no one shall issue any form of application
for shares in or debentures of a company, unless the form is accompanied by a memorandum containing such
salient features as may be prescribed, which complies with the requirements of the section.
The second proviso to the Sub-section (3) lays down that the sub-section shall not apply if it is shown that the
share application form was issued - (a) in connection with a bona fide invitation to a person to enter into an
underwriting agreement with respect to the shares or debentures; or (b) in relation to shares or debentures
which were not offered to the public.
The Government has instructed that share application form should be a part of the abridged prospectus, being
attached to it along a perforated line. The abridged prospectus and the share application form should bear the
same printed serial number. The investor may detach the share application form along with the perforated line
after he had an opportunity to study the contents of the abridged prospectus, before submitting the same to the
company or to its designated banker. The Central Government later allowed companies and their merchant
bankers to print application forms, accompanying one abridged prospectus, being attached to it, along the
perforated line, bearing separate printed numbers.
The same procedure should also be followed while making available copies of the prospectus under Section 56
of the Act.
In this connection, it may be pointed that contravention of the provisions of Section 56(3) is punishable with fine
which may extend to ` 50,000.

Partial Allotment
Although the company, in consultation with the manager to the issue and adviser to the issue, must have
included an appropriate clause in its share application form to the effect that partial allotment, if made by the
company, would be binding on the applicant, yet no provision of any law can be circumvented in such a manner
so as to deprive any person of his right, which has been conferred upon him by virtue of that provision.
Under the law of contract as applicable in India, an application for allotment of shares in a company is only an
offer to accept shares that may be allotted to the applicant. An applicant may refuse to accept fewer than the
shares applied for if he so wishes, because an offer, if accepted in part, does not constitute acceptance of the
offer and is not binding on the offeror under the Indian Contract Act, 1872. However, if he chooses to accept the
quantity of the shares offered, then his acceptance turns the deal into a contract binding on both the applicant
and the company under the Contract Act and is justifiable in a Court of law.
Lesson 4 Allotment of Securities 149

Time limit for allotment


An allotment should be made within a reasonable time and an applicant is not bound to accept an allotment after
the lapse of a reasonable time. A delay of one year is unreasonable. Indian Co-operative Navigation & Trading
Co. Ltd. v. Padamsey Premji (1934) 4 Com Cases 110 (Bom).

Irregular Allotments
Sections 69, 70, 72 and 73 of the Companies Act, 1956 prescribe conditions of valid allotment. Violation of any
one of those conditions would result into defective or irregular allotment. An irregular allotment may be void or it
may be voidable. A void allotment is no allotment whereas a voidable allotment may be one which may be
avoided by the allottee. Where the allotment is defective for the reason that it was made before the expiry of the
fifth day after the publication of prospectus issued by the company generally or such other later day specified in
the prospectus, the allotment is valid, but the company and every officer of the company who is in default shall
be punishable with fine which may extend to fifty thousand rupees as per Sub-section (3) of Section 72 of the
Act.

Voidable Allotment
According to Section 71 of the Companies Act, 1956, an allotment made by a company to an applicant in
contravention of the provisions of Section 69, which prohibits allotment unless minimum subscription has been
received by the company or in contravention of the provisions of Section 70, which prohibits allotment in certain
cases unless statement in lieu of prospectus has been delivered to the Registrar, is irregular allotment and shall
be voidable at the instance of the applicant
(a) within two months after the holding of the statutory meeting of the company, and not later, or
(b) in any case where the company is not required to hold a statutory meeting or where the allotment is
made after holding of the statutory meeting, within two months after the date of the allotment, and not
later.
The allotment shall be voidable, notwithstanding that the company is in course of being wound-up.

Void Allotment and its Effects


According to Sub-section (1A) of Section 73, where a prospectus states that an application has been made for
permission for the shares or debentures offered thereby to be dealt in one or more designated stock exchanges,
such prospectus shall state the name(s) of the stock exchange(s) and any allotment made on an application in
pursuance of such prospectus shall, whenever made, be void if the permission has not been granted by the
stock exchange or each such stock exchange, as the case may be, before the expiry of ten weeks from the date
of the closing of the subscription list.
However, where an appeal against the decision of any stock exchange refusing permission for the shares or
debentures to be dealt in on that stock exchange has been preferred to Securities Appellate Tribunal under
Section 22A of the Securities Contracts (Regulation) Act, 1956, such allotment shall not be void until the dismissal
of the appeal.
As is clear from the wording of Sub-section (1A) as highlighted above, even if a single stock exchange refuses
to grant permission to the shares of the company to be dealt in on it, the entire allotment becomes void, unless
the company succeeds in appeal against the decision of such stock exchange [Rich Paints Ltd. v. Vadodara
Stock Exchange Ltd. (1998) 28 CLA 276 (Raj.)].
Sub-section (2) of Section 73 provides that where the permission has not been applied or such permission
having been applied for, has not been granted, the company shall forthwith repay without interest all moneys
received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days
150 PP-ACL&P

after the company becomes liable to repay it, the company and every director of the company, who is an officer
in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with
interest at such rate not less than four per cent and not more than fifteen per cent, as may be prescribed, having
regard to the length of the period of delay in making the repayment of such money [Refer Sub-section (2) of
Section 73].
Sub-section (2A) of Section 73 lays down that where permission has been granted by the recognised stock
exchange or stock exchanges for dealing in any shares or debentures in such stock exchange or each such
stock exchange and the moneys received from applicants for shares or debentures are in excess of the aggregate
of the application moneys relating to the shares or debentures in respect of which allotments have been made,
the company shall repay the moneys to the extent of such excess forthwith without interest and if such money is
not repaid within eight days from the day the company becomes liable to pay it, the company and every director
of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally
liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per
cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such
money.
In Raymond Synthetics Ltd. v. Union of India (1992) 73 Com Cases 1 (1991) 3 Comp L.J 1 (Bombay DB), the
decision of the Division Bench of the Bombay High Court was to the effect that liability to refund excess amounts
would begin from the date of allotment if completed earlier than ten weeks because the excess amount having
become known, there was no point in withholding its refund upto the expiry of ten weeks.
All moneys received from applicants for shares must be kept in a separate account maintained with a scheduled
bank and they shall not be utilised for any purpose other than adjustment against allotment of shares or for
repayment to the applicants [Refer Sub-section (3) of Section 73].
Points need to know
Return of allotment is not required to be filed when allotment was made to the subscriber of
Memorandum and Articles of Association.
The return of allotment is not required to be filed where debentures are allotted.
A private company can allot shares without issuing prospectus or filing a statement in lieu of prospectus.

ALLOTMENT PROCEDURE
After the closure of the issue, the Registrar to the issue, in active collaboration with the company, must make all
efforts to collect from the bankers to the issue, all the share applications along with their branch/city/town-wise
schedules containing details in respect of each application, e.g., serial number allotted to each application,
name(s) of the applicant(s), number of shares for which the application money has been received by the bank,
amount of money received along with each application and any other detail that has been asked for by the
managers and/or Registrar to the issue.
After all the applications along with their schedules have been received from the bankers to the issue, the
Registrar to the issue, in consultation with the company, should prepare basis of allotment. If the issue is fully
subscribed or under-subscribed, preparing basis of allotment poses no problem. However, if the issue is over-
subscribed, the shares have to be allotted on proportionate basis and a little more effort is required to be made
by the Registrar to the issue to make allotment in accordance with the SEBI (Issue of Capital & Disclosure
Requirements) Regulations, 2009.
After the basis of allotment has been finalised by the Registrar to the issue, the same is communicated jointly by
the secretary of the company and a representative of the Registrar to the issue, to the regional stock exchange
(SE), where the shares are proposed to be listed, for its approval.
Lesson 4 Allotment of Securities 151

The stock exchange scans the basis of allotment presented to it along with all the relevant papers, e.g.
(i) applications along with statements containing details of the applications,
(ii) their bank-branch-wise and city, town, village-wise schedules,
(iii) break-up statements prepared by the registrar to the issue stating the number of applicants in various
categories e.g., applicants for upto 200 shares, applicants for between 201 and 500 shares, applicants
for between 501 and 1000 shares and so on upto the category of applicants for the maximum number
of shares,
(iv) consent letters of and agreements with the underwriters, brokers, bankers, and adviser to the issue and
other market intermediaries, who are connected with the issue, and
(v) all the material contracts, documents etc. which have been listed in the prospectus.
The stock exchange approves the basis of allotment, with or without modification.
Immediately on receipt of the approved basis of allotment, get it published in newspapers and send copies of the
same to the Securities and Exchange Board of India (SEBI) and all other stock exchanges where the shares are
proposed to be listed. It is a common practice that all other stock exchanges agree with and accept the approval
of the basis of allotment by the regional stock exchange.
After the basis of allotment has been approved by the regional stock exchange and copies thereof have been
forwarded to SEBI and other stock exchanges, the Company Secretary should immediately obtain from the
Registrar to the Issue, the register of share applications and allotment containing, in respect of each applicant,
the following particulars:
1. Application No.
2. Register of members folio number
3. Name(s) of the applicant(s)
4. Name of the applicants father/husband
5. Occupation
6. No. of shares applied for
7. Amount received along with the share application
8. No. of shares allotted
9. Amount refundable.
Thereafter, the company secretary, in consultation with the chairman of the Board meetings and/or the managing
director, if there is one, fix time, date and venue for holding a meeting of the Board of directors, for allotment of
shares, and for transacting any other business which is required to be transacted at that meeting.
The Board of directors of the company to hold its meeting and allot shares to the applicants as per entries in the
register of share applications and allotment of shares, which has been prepared by the Registrar to the issue
according to the approved basis of allotment. The allotment of shares must be made by passing a Board resolution.
[For specimens of Board resolutions allotting shares:
(i) when part of the nominal value of the shares has been received by the company;
(ii) when full nominal value of the shares has been received by the company;
(iii) when the issue is over-subscribed; and
152 PP-ACL&P

(iv) for a consideration other than cash,


please see Annexures I, II, III and IV respectively, at the end of this study].
Within thirty days of the allotment of shares, the company should, in compliance with the provisions of Section
75 of the Companies Act, 1956, file with the concerned Registrar of Companies, a return of allotment in the e-
form 2, prescribed in the Companies (Central Governments) General Rules and Forms (Amendment) Rules,
2006, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses
and occupations of the allottees, and the amount, if any, paid or due and payable on each share. The company
should not mention in the Return, any shares as having been allotted for cash, if cash has not actually been
received in respect of such allotment. This return in e-form 2 should be filed by the managing director or director
or manager or secretary of the company duly authorized by the Board. This e-form should be pre-certified by
company secretary/ chartered accountant/cost accountant (in whole-time practice) by affixing his Digital Signature.
Further requisite fee is payable as per Schedule X depending upon the authorized capital of the company. The
following documents should be enclosed to this e-from:-
(i) List of allottees (through addendum if the file size is big);
(ii) Copy of Board resolution
Thereafter, share certificates should be prepared, got stamped, signed, sealed as per the authority of the Board
of directors of the company and the articles of association of the company and delivered to the allottees of the
shares within three months after the allotment, as per Section 113 of the Companies Act and the Companies
(Issue of Share Certificate) Rules, 1960.
However, in the case of the applicants opting for demat mode (not to receive share certificates for securities
allotted), the Registrar should prepare the details of such applicants with their client Identification Number and
depository participant nos. and intimate the details of such allottees as beneficial owner for the number of
securities allotted. In such cases, the certificates shall not be issued. Pursuant to Section 152A, Register and
Index of Beneficial owners should be prepared.
At this stage the company should, in pursuance of Sections 150 and 151 of the Companies Act, prepare a
register and index of its members, enter all the relevant details therein and keep the same always in updated
form at the registered office of the company. In this work, the Registrar to the issue may render some assistance.
He can prepare the register and the index of members with ease as he has all the data in his computer network.
The company should cut off specimen signatures of the allottees from their application forms and have them
pasted in the Members specimen signatures register for tallying the same at any point of time in future. The
specimen signature can also be scanned and kept on specially designed software for tallying purposes.
Point need to know
In case of allotment of shares to an NRI, the Foreign Exchange Management Regulations should be
complied with.

MAKING CALLS ON SHARES


The power to make calls can be exercised only by the Board by means of a resolution passed at a duly convened
Board meeting. The power cannot be delegated to Committee of directors [Section 292]. A call may be revoked
or postponed at the discretion of the Board [Regulation 13]. This power of making a call vested in the directors
is a fiduciary power to be exercised for the benefit of the company.
A call must be made in accordance with the provisions contained in the companys articles. Where the articles
require that the resolution of the directors should indicate the time, amount, place and person to whom the
amount of the call should be paid, every requirement should be strictly complied with.
Lesson 4 Allotment of Securities 153

Procedure to Make Calls on Shares


1. Convene a Board Meeting after giving notice to all the directors of the company as per Section 286 and
pass a resolution calling whole or any portion of the unpaid amount on the shares of the company
stating, inter-alia, the time, the place, the amount of call and the last date of making the payment. (For
specimen of the board resolution, see Annexure V)
2. The call should be uniform on the same class of shares on which the same amounts have been paid.
[Section 91]
3. Comply with any condition imposed in the Articles of Association of the company in this regard.
4. If the companys Articles of Association provide as in Table A to Schedule I to the Companies Act, 1956,
then no call should exceed one-fourth of the nominal value of the share or payable at less than one
month from the date fixed for the payment of the last preceding call (applicable to subsequent calls).
5. Issue call letters and send necessary reminders until the call is fully paid or the shares are forfeited.
6. Make necessary entries in various registers.
7. If any amount is paid in advance of calls on any shares, then stipulate that such amount may carry
interest but shall not in respect thereof confer a right to dividend or to participate in profits.
8. If the shares of the company are listed on a recognised Stock Exchange, then:
(i) approval of the call notice by the Stock Exchange is required;
(ii) Intimate about the decision of the board meeting within 15 minutes of the closure of the said meeting
to the Stock Exchange;
(iii) Forward promptly to the said Stock Exchange three copies of the call letters.
(iv) Ensure that the calls are structured in such a manner that the entire subscription money is called
within 12 months from the date of allotment.
9. Take note of Regulations 13 to 18 of Table A of Schedule I to the Act also.
10. Particulars in respect of amount called up and unpaid call must be disclosed in the Balance Sheet as
required by Schedule VI.

ISSUE OF SHARE CERTIFICATES


A share certificate is a document of title to the shares in a company. It is issued by a company to its members in
whose names shares are registered in the register of members of the company.
A share certificates certifies the
(i) nature of the shares, i.e. equity or preference.
(ii) member(s) in whose name(s) it is issued is(are) the rightful owner(s) of the shares, with distinctive
numbers, as detailed therein; and
(iii) amount paid to the company by the shareholder on each share at various stages, i.e., on application, on
allotment, as first call, as the second and final call.
All blank forms to be used for issue of share certificate shall be printed and printing shall be done only on the
authority of a resolution of the Board. The blank forms shall be consecutively machine numbered and the forms
and the blocks, engravings, facsimiles etc. shall be kept in safe custody of the Secretary or the person authorised
by the Board.
154 PP-ACL&P

A share certificate is issued by a company under the signatures of at least two of its directors, one of whom
should be the managing director, if there is one, and the company secretary or an Authorised Signatory.
A share certificate is issued under the common seal of the company, which is affixed in the presence of directors/
secretary/ authorised signatory, according to the provisions contained in the articles of association of the company
and the Companies (Issue of Share Certificates) Rules 1960. However, the director(s) may sign a share certificate
by affixing his signature thereon by means of any machine, equipment or other mechanical means such as
engraving in metal or lithography, but not by means of a rubber stamp provided that the director shall be responsible
for the safe custody of such machine, equipment or other material used for the purpose. However, the Secretary
or Authorised Signatory should sign share certificate by his hand.
The issue of share certificates by a company is regulated by:
(i) The Companies Act, 1956;
(ii) The Companies (Issue of Shares Certificate) Rules, 1960;
(iii) Listing Agreements entered by the company with recognised stock exchanges;
(iv) SEBI rules and regulations; and
(v) Articles of Association of the company.
According to Section 113 of the Companies Act, 1956, every company shall, within three months after the
allotment of any of its shares, debentures or debenture stock and within two months after the application for the
registration of transfer of any such shares, debentures or debenture stock deliver, in accordance with the procedure
laid down in Section 53, the certificates of all shares, debentures and certificates of debenture stocks allotted or
transferred. The Act, however, confers power on the Company Law Board* to extend the aforesaid periods of
three months and two months within which the debenture certificates or debenture stock certificates allotted or
transferred shall be delivered, to a further period not exceeding nine months, if it is satisfied on an application
that it is not possible for the company to deliver such certificates within the said periods.
It may also be noted that those companies, whose shares have been dematerialised and a depository is the registered
owner of their shares, are required to intimate the depository immediately on allotment of shares and the depository
is required to immediately enter in its electronic records, the names of owners of the shares, as beneficiaries.

Procedure for Issue of Share Certificates


Issue of Original Share Certificates
1. The resolution for allotment of share certificates will be passed at the duly convened Board Meeting.
2. The Board will approve of the number of share certificates and authorise by resolution the printing of
share certificates.
3. Where the shares are listed on a recognised stock exchange, the forms of certificate will be approved in
advance by the stock exchange before printing.
4. All blank forms consecutively numbered, blocks, engravings, etc., will be in the custody of the Secretary
or other person appointed by the Board.
5. Every certificate will specify the name(s) of the person(s) in whose favour it is issued, the shares to
which it relates, the distinctive number and the amount paid up thereon.
6. In the resolution passed for issue of share certificates, the Board will also specify that the common seal of
the company will be affixed in the presence of at least two directors of the company or their duly constituted
attorneys and the Secretary or any person appointed by the Board who will sign the share certificate.
* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come into effect.
Lesson 4 Allotment of Securities 155

7. The depository shall be informed immediately after the shares are issued in case there exists an
arrangement with a depository.
8. Particulars of share certificates issued will be entered in the register of members in respect of each
member. The Register will be in the form prescribed in the Rules.
9. The share certificates will be delivered within the time specified in section 113.

Issue of Duplicate Share Certificates


A company should issue share certificates to the existing members of the company, who request for the issue of
duplicate share certificates in the event of their original share certificates having been misplaced, lost, destroyed,
mutilated, defaced or no more cages are left on the reverse of their share certificates for further transfer
endorsements.
If the share certificates are to be issued in lieu of misplaced, lost, destroyed share certificates, then the company
need not insist on the surrender of the original certificates. However, mutilated share certificates have to be
surrendered to the company before the Board can consider issuing duplicates in lieu thereof.
No share certificates should be issued without the authority of the Board, which should be accorded by means
of a Board resolution which is required to be passed at a duly convened and held meeting of the Board of
directors of the company.
(For specimen of Board resolution authorising the issue of share certificates and duplicate certificates, please
see Annexures VI and VII at the end of this study).

Issue of Share Certificates on Surrender of Letters of Allotment


A company, which has issued Letters of Allotment to the allottees at the time of allotment, should not issue a
share certificate to any allottee unless he has paid the allotment money and has also surrendered the Letter of
Allotment to the company. In the event of loss or misplacement of the Letter of Allotment, the Board of directors
of the company may issue share certificates, at its absolute discretion and on compliance of certain reasonable
conditions that may be imposed by the Board and on furnishing of certain documents, e.g. affidavit, letter of
indemnity and on payment of certain reasonable charges that the company may have to incur or might have
incurred.
(1) After the conclusion of the Board meeting, the company secretary should draft and have the minutes
of the Board meeting approved, entered in the minutes book kept for the purpose and signed by the
chairman of the Board meeting. Thereafter, he should have the share certificates prepared, stamped
with the stamps of appropriate value, have them signed by the directors in addition to his own
signature, as per the authorisation granted to them by the Board at its meeting, affix the common
seal of the company in the presence of the signing directors and himself and arrange for their
delivery to the concerned shareholders. The share certificates must be despatched by registered
post with acknowledgement due, after making their entries in the register of members, register of
renewed and duplicate certificates, as the case may be, and also the despatch register of the
company.
(2) The expenditure incurred by the company on the issue and mailing of original share certificates has to
be borne by the company. However, the company may, if its articles permit, charge a reasonable fee for
the issue of duplicate share certificates, not exceeding two rupees for each duplicate share certificate.
However, the cost of public notice of loss of share certificates has to be borne by the member who has
lost, destroyed or misplaced his share certificates.
(3) The company has to ensure that the share certificates of those shares belonging to promoters, their
relatives, friends and business associates, which are under a lock-in period, must bear rubber stamp
156 PP-ACL&P

clearly indicating that the shares are not transferable before a particular date and that endorsement
must be subscribed on the Share Certificates and initialled by the company secretary or by any other
responsible officer of the company.
(4) The secretary has also to stamp all the duplicate share certificates before they are mailed. The stamp
should clearly state that the share certificate is a Duplicate issued in lieu of share certificate No.......
Share Certificates Issued on Splitting or Consolidation
In some cases, the shareholders request for the issue of split or consolidated share certificates. In all such
cases, the old share certificates must be surrendered to the company before the Board may be requested to
consider the issue of new share certificates after split or consolidation. All the defaced and mutilated share
certificates should be stamped with a rubber stamp bearing in bold letters the endorsements: CANCELLED
DUPLICATE SHARE CERTIFICATE NO...... DATED......ISSUED IN LIEU.
The company is required to keep a separate register of renewed and duplicate certificates which must contain
all the relevant details of the old and the new share certificates.

ANNEXURES
ANNEXURE I
BOARD RESOLUTION ALLOTTING SHARES WHEN PART OF THE NOMINAL VALUE OF EACH SHARE
HAS BEEN RECEIVED AND ALLOTMENT MONEY HAS TO BE CALLED FOR
RESOLVED THAT
(i) .................... equity shares of ` ....... each in the share capital of the company be and are hereby allotted
to the applicants, whose names, addresses and other relevant details including the number of shares
allotted to each one of them, have been entered in the Applications and Allotment Register on page
numbers......to...... (both inclusive), which was laid on the table of the meeting and was initialled by the
chairman of the meeting for the purpose of identification; and
(ii) the letters of allotment be forwarded to each allottee and that the sum of ` .......per share due on
allotment be made payable on or before the......day of...... 20....; and
(iii) Shri ......................, Company Secretary be and is hereby authorized to file the e-form 2, as prescribed
in the Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006, the
return of allotment in respect of the shares allotted aforesaid, with the Registrar of Companies along
with the prescribed filing fee, within thirty days of the passing of this resolution.
ANNEXURE II
SPECIMEN OF BOARD RESOLUTION ALLOTTING SHARES, WHEN FULL NOMINAL VALUE OF EACH
SHARE HAS BEEN RECEIVED
RESOLVED THAT
(i) .................... equity shares of ` ....... each in the share capital of the company be and are hereby allotted
to the applicants, whose names, addresses and other relevant details including the number of shares
allotted to each one of them, have been entered in the Applications and Allotment Register on page
numbers......to...... (both inclusive), which was laid on the table of the meeting and was initialled by the
chairman of the meeting for the purpose of identification; and
(ii) the share certificate for the allotted .............. equity shares of ` .......... each fully paid to be issued to the
allottees in accordance with the lots of shares permitted by the Regional Stock Exchange and the
provisions of Section 113 of the Companies Act, 1956 and executed in accordance with the Companies
(Issue of Share Certificates) Rules, 1960 under the signatures of Shri................, managing director,
Lesson 4 Allotment of Securities 157

Shri.................., director and Shri........................ Company Secretary and under the common seal of
the company, which shall be affixed in the presence of all the signatories.
(iii) Shri ......................, Company Secretary be and is hereby authorised to file the e-form 2, as prescribed
in the Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006, the
return of allotment in respect of the shares allotted aforesaid, with the Registrar of Companies along
with the prescribed filing fee, within thirty days of the passing of this resolution.
ANNEXURE III
SPECIMEN OF BOARD RESOLUTION ALLOTTING SHARES IN THE EVENT OF OVERSUBSCRIPTION OF
THE ISSUE
RESOLVED THAT
(i) ........fully paid equity shares of ` ....... each in the capital of the company be and are
hereby allotted to the allottees as per the basis of allotment approved by the Regional Stock Exchange
at............, to the applicants whose names, addresses and other relevant details have been
entered in the applications and allotment register including the number of shares allotted to each allottee,
which was laid on the table of the meeting and initialled by the chairman of the meeting for the purpose
of identification;
(ii) Shri .................., Company Secretary, be and is hereby authorized to file with the Registrar of Companies,
the Return of Allotment of the shares in the e-form 2, as prescribed in the Companies (Central
Governments) General Rules and Forms (Amendment) Rules, 2006, along with the prescribed filing
fee within thirty days of the passing of this resolution; and
(iii) the share certificates for the................ equity shares allotted be issued to the allottee(s) in accordance
with the provisions of Section 113 of the Companies Act, 1956 and the Companies (Issue of Share
Certificates) Rules, 1960 under the signatures of Shri................, Managing Director, Shri..................,
Director and Shri....................... Company Secretary, under the common seal of the company, which
shall be affixed in the presence of all the signatories.
ANNEXURE IV
SPECIMEN OF BOARD RESOLUTION ALLOTTING SHARES FOR A CONSIDERATION OTHERWISE THAN
IN CASH
RESOLVED THAT
(i) in terms of the agreement dated ......., 20.... entered into by and between the company and
Shri....................., ..........fully paid equity shares of ` ...... each of the company be and are hereby allotted
to the said Shri ...................................; which is not paid in cash but in full satisfaction of the amount
which the company owed to the said Shri ................. as purchase price of the piece of land situated at
..................... sold by the said Shri ....................... to the company for the purpose of constructing the
companys manufacturing unit, details whereof have been incorporated in the agreement
(ii) Shri ................., Company Secretary, be and is hereby authorized to file with the Registrar of Companies,
the Return of Allotment of the shares in e-form 2 and 3 as prescribed in the Companies (Central
Governments) General Rules and Forms (Amendment) Rules, 2006, along with a certified copy of the
said agreement in accordance with Section 75(1)(b) of the Companies Act, 1956 and the prescribed
filing fee, within thirty days of the passing of this resolution; and
(iii) the share certificate(s) for the ................ fully paid equity shares allotted be issued to the allottees in
accordance with Section 113 of the Companies Act, 1956 and the Companies (Issue of Share Certificates)
Rules, 1960 under the signatures of Shri........., Managing Director, Shri.............., Director and
158 PP-ACL&P

Shri.........., Company Secretary, under the common seal of the company, which shall be affixed
in the presence of all the authorised signatories.
ANNEXURE V
SPECIMEN BOARD RESOLUTION FOR MAKING CALLS ON SHARES
RESOLVED that the first and final call of ` 5/- per share of the Company be made upon 2,50,000 equity
shares of ` 10/- each and that the said call be made payable on or before 31st July, 2013.
RESOLVED FURTHER that the Indian Overseas Bank, Mumbai with its main offices at Agra, Ahmedabad,
Allahabad, Bangalore, Baroda, Calcutta, Chandigarh, Dehradun, Kanpur, Hyderabad, Lucknow, Chennai,
Nagpur and New Delhi and State Bank of India with its main offices at Indore and Ghaziabad be and are
hereby appointed as bankers of the Company for the purpose of collection of call moneys on the aforesaid
shares.
RESOLVED FURTHER that Industrial Investment Trust Limited, Mumbai, Companys Issue House be and
are hereby authorised to issue call notices on behalf of the Company.
RESOLVED FURTHER that the aforesaid accounts be and are hereby operated on behalf of the Company by
Shri SKM ,Managing Director of the Company.
ANNEXURE VI
SPECIMEN OF BOARD RESOLUTION AUTHORISING THE ISSUE OF SHARE CERTIFICATES
RESOLVED THAT
(i) pursuant to Section 113 of the Companies Act, 1956, and the Companies (Issue of Share Certificates)
Rules, 1960, letter of permission dated of the stock exchange at..............., the listing
agreement and the rules and regulations issued by the Securities and Exchange Board of India in this
respect, share certificates bearing distinctive Nos............. to....... (both inclusive) be and are
hereby authorized to be issued to the registered members of the company, whose names are set out
below :
Name of the Certificate Number of Distinctive Nos.
shareholder Nos. shares From To
1 2 3 4 5

(ii) the share certificates be issued within the prescribed period of time, under the signatures of the
Shri..................... Managing Director, Shri.................... Director, and the Shri................. Company
Secretary, and under the common seal of the company, which shall be affixed thereto in the presence of
the directors and the Company Secretary as per provisions of article No. .......... of the articles of association
of the company..
ANNEXURE VII
SPECIMEN OF BOARD RESOLUTION AUTHORISING THE ISSUE OF DUPLICATE SHARE CERTIFICATES
The chairman informed the meeting that
(i) the company had received from Shri ................., a request for the issue of a duplicate share certificate
in lieu of original certificate No.........., which was reported to have been lost by him;
Lesson 4 Allotment of Securities 159

(ii) the said shareholder had executed an affidavit and an indemnity bond in favour of the company and a
notice of such loss was published in the Hindustan Times dated .............;and
(iii) a duplicate share certificate for .......... fully paid equity shares of ` ........ each bearing distinctive numbers
....... to ....... (both inclusive) was required be issued to the said member in lieu of original share certificate
No......
The directors considered the request of the member and passed the following resolution:
RESOLVED THAT an equity share certificate No for............ fully paid equity shares of ` ........
each of the company bearing distinctive numbers......... to......... (both inclusive) after stating on the face
thereof the words Duplicate issued in lieu of share certificate No..... be and is hereby issued in the
name of Shri........ in lieu of original share certificate No....... reported to have been lost by him, and that the
duplicate share certificate be issued under the signatures of Shri................... Managing Director, Shri..................
Director, and the Shri.............. Company Secretary, under the common seal of the company to be affixed
thereto in the presence of the Directors and the Company Secretary.

LESSON ROUND-UP
In accordance with section 75, every company allotting shares is required to file a return of allotment
in e-form 2 within thirty days of the allotment.
If the conditions of valid allotment specified in sections 69, 70, 72 and 73 of the Companies Act, 1956
are not complied with, it results in irregular allotment.
An irregular allotment may be void or voidable.
Companies are required to maintain the register of members under section 150 and enter therein the
details of members.
After allotment of shares, share certificates are issued to the members in accordance with the provisions
of the Companies Act and Companies (Issue of share certificates) Rules, 1960.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Write the Board resolution/resolution in General Meetings for:
(a) allotting shares when the issue is over-subscribed
(b) allotting shares for a consideration otherwise than in cash
(c) for making calls on shares
2. Explain the procedure for issue of duplicate share certificates.
3. What is irregular allotment and what are the legal effects of a irregular allotment?
160 PP-ACL&P
Lesson 5 Alteration of Share Capital 161

Lesson 5
Alteration of Share Capital

LESSON OUTLINE
LEARNING OBJECTIVES
Alteration of share capital
Every company limited by shares must have a
Procedure for Increase in share capital share capital. Share capital of a company refers
to the amount invested in the company for it to
Procedure for consolidation of share carry out its operations. The capital clause in
capital Memorandum of Association states the amount
of capital with which company is registered
Procedure for sub-division of share capital giving details of number of shares and the type
of shares of the company. The share capital may
Conversion of shares into stock be altered or increased, subject to certain
conditions. A company cannot issue share
Re-conversion of stock into fully paid capital in excess of the limit specified in the
shares capital clause without altering the capital clause
of the memorandum of association.
Forfeiture of shares
Under the Companies Act, 1956, a company
Cancellation of shares limited by shares, if authorized by its articles of
association, can alter the capital clause of its
Surrender of shares memorandum of association. Such alteration
may either involve increase in share capital by
Reduction of share capital issuing new shares, consolidation and division
of share capital into shares of larger amount
LESSON ROUND UP than existing shares, conversion of fully paid
shares into stock, re-conversion of that stock
SELF TEST QUESTIONS
into shares, sub-division of shares, cancellation
of its shares, surrender of shares, reduction of
share capital etc. After going through this
lesson, students will be able to understand
practical and procedural aspects relating to
alteration of its share capital and related
compliances.

161
162 PP-ACL&P

ALTERATION OF SHARE CAPITAL OF A COMPANY


A company can exercise its powers to alter its share capital only if it is authorised by its articles. If the articles do
not contain any such authorization, the articles must first be amended, before the power can be exercised. The
power must be exercised bona fide in the interest of the company and not for benefitting any group (Piercy vs.
Mills(s) & Co., (1920) 1 Ch. 77.
Sections 94, 95, 96, 97 and 100 of the Companies Act, 1956 lay down the procedure for alteration of share
capital of a company. According to Sub-section (1) of Section 94 of the Companies Act, a limited company,
having a share capital, may, if so authorised by its articles, alter the conditions of its memorandum so as to alter
its share capital, as follows, that is to say, it may
(a) increase its share capital by such amount as it thinks expedient by issuing new shares;
(b) consolidate all or any of its share capital into shares of larger amount than its existing shares;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares
of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum,
so, however, that in the sub-division the proportion between the amount paid and the amount, if any,
unpaid on each reduced share shall be the same as it was in the case of the share from which the
reduced share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or
agreed to be taken by any person, and diminish the amount of its share capital by the amount of the
shares so cancelled.
Sub-section (2) of Section 94 lays down that the powers conferred by this section shall be exercised by the
company in general meeting and shall not be required to be confirmed by the Court.
A cancellation of shares in pursuance of this section shall not be deemed to be a reduction of share capital
within the meaning of the Companies Act. In fact, this is known as diminution of share capital [Section 94(3)].

Filing of (e-form 5) notice of change in share capital with ROC


Section 95 of the Act makes it obligatory on the part of a limited company having share capital, which has
consolidated, sub-divided, converted, re-converted, redeemed any redeemable preference shares, or cancelled
any shares otherwise than in connection with a reduction of share capital under Sections 100 to 104, togive
notice thereof to the Registrar in the prescribed e-form 5, within thirty days of the passing of the resolution,
specifying the shares consolidated, converted, re-converted, sub-divided, redeemed or cancelled and the Registrar
shall record the same in the memorandum of the company. Further revised capital structure and particulars of
payment of stamp duty has to be stated in this e-form. Managing director or director or manager or secretary of
the company has to sign e-form 5. This e-form is required to be pre-certified by a professional i.e. Company
Secretary/Chartered Accountant/Cost Accountant in whole time practice.
(For specimen of e-form 5, notice of consolidation, division etc. increase in share capital/increase in number of
members, please refer the CD provided along with the Study Material or see the link http://www.mca.gov.in/
MCA21/Download_e-Form_choose.html ).
The attachments alongwith e-form 5 are:
1. Proof of receipt of Central Government order, where applicable
2. Altered memorandum of association
Lesson 5 Alteration of Share Capital 163

3. Altered articles of association(in case capital clause in the Articles is altered)


4. Optional attachment(s) - if any
Note:
Stamp duty on e-Form 5 can be paid electronically through the MCA portal and in such case submission
of physical copy of the uploaded e-Form 5 to the office of RoC is not required.
Payment of stamp duty electronically through MCA portal is mandatory in respect of the States which
have authorized the Central Government to collect stamp duty on their behalf.
In case stamp duty is not paid electronically through MCA portal, it is required to deliver simultaneously
the original stamped physical copies of the uploaded e-Form 1, MoA and AoA along with a copy of
challan/receipt in the concerned office of RoC failing which such e-Form shall be put into Waiting for
user clarification in terms of Regulation 17 of the Companies Regulations, 1956.
Refund of stamp duty, if any, will be processed by the respective State or Union Territory Government in
accordance with the rules and procedures as per the State or Union Territory Stamp Act.
The Honble High Court of Delhi at New Delhi has held in the matter of S E Investments Limited Vs.
Union of India and Others [W.P.(C) 2393/2010 and CM Appl.4794/2011] that there is no provision in the
Delhi Stamp Act for payment of stamp duty on increased authorised capital. Payment of stamp duty for
increase of authorised capital being paid with filing of e-Form No.5 with respect to State of National
Capital Territory of Delhi is made optional.
However, students are advised to refer to the relevant Stamp Act of the respective State where the registered
office of the company is situated.

PROCEDURE FOR INCREASING SHARE CAPITAL


The need to increase the authorize capital may arise when the company is planning to enlarge its operations by
fresh issue of capital. For increasing its authorized share capital, the following procedure has to be followed by
a limited company having a share capital:
1. The company has to ensure that its articles of association contain a clause authorising it to increase its
authorised share capital. If there is no such provision, then the company has to take steps for alteration
of its articles of association in accordance with the provisions of section 31 of the Companies Act, 1956,
so as to provide for power to increase the share capital of the company before increasing its authorised
share capital.
2. Issue notice in accordance with the provisions of Section 286 of the Act for convening a Board meeting.
3. Hold the meeting
(i) to decide about the increase in the authorised share capital of the company;
(ii) to fix time, date and venue for holding general meeting of the company to pass an ordinary resolution
for increasing the authorised share capital of the company [Refer Section 94(2)];
If the Articles of Association prescribe that a special resolution is required to be passed for increasing
the authorized share capital, the company shall pass a special resolution)
(For specimen of ordinary resolution for increasing the authorised share capital of the company,
please see Annexure I at the end of this Study).
(iii) to approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act;
164 PP-ACL&P

(iv) to authorise the company secretary to issue, on behalf of the Board, notice of the general meeting
as approved by the Board.
4. Soon after the conclusion of the Board meeting, send to the stock exchanges, where the securities of
the company are listed, particulars of the proposed increase in the authorised share capital of the
company.
5. Issue notice of the general meeting to all members, directors and the auditors of the company.
6. In case of a listed company, forward three copies of the notice of the general meeting to the concerned
stock exchanges as per the Listing Agreement.
7. Hold the general meeting and pass ordinary/special resolution for increasing the authorised share capital
of the company [Refer Section 94(2)];
8. In case of a listed company, forward a copy of the proceedings of the general meeting to the concerned
stock exchange as per the Listing Agreement.
9. If a special resolution has been passed, file with the Registrar within thirty days of passing of the resolution,
e-form 23 with a certified true copy of the special resolution passed at the general meeting along with a
copy of the explanatory statement annexed to the notice of the general meeting, copy of altered
Memorandum of Association and Articles of Association, and the prescribed filing fee.
10. File with ROC, e-form 5 along with the registration fee on increased authorised capital as per rates
prescribed under Schedule X to the Act within 30 days of the passing of the resolution.
The mandatory attachments alongwith e-form 5 are:
(a) Altered memorandum of association.
(b) Altered articles of association, if capital clause exists in the Articles.
(c) Where applicable, proof of receipt of Central Government order, if any for increase of authorized
share capital.
11. In the case of a listed company, forward six copies (one of them certified) of the amendment to the
memorandum to all the stock exchanges, where the securities of the company are listed.
12. Alter the capital clause in all the copies of the memorandum and articles of association of the company
lying in the office of the company so that no unaltered copy thereof is issued to any person.

PROCEDURE FOR CONSOLIDATION OF SHARE CAPITAL


For consolidation of its share capital, a company is required to take the following procedural steps:
1. It must ensure that its articles of association contain a clause, authorizing it to consolidate its shares. If
there is no such provision, then the articles have to be first altered in accordance with the provisions of
Section 31 of the Companies Act, 1956.
2. Give twenty-one days notice of the proposed consolidation of the shares of the company to the stock
exchanges on which the securities of the company are listed.
3. Make an application to the stock exchanges on which the securities of the company are listed and any
other stock exchange on which the company proposes for getting its consolidated shares listed.
4. Convene and hold a Board meeting to
(i) Pass a resolution approving the proposed consolidation of the shares of the company;
(ii) Fix time, date and venue for holding a general meeting of the company to pass an ordinary resolution
or a special resolution, if so required by the articles for this purpose [Refer Section 94(2)];
Lesson 5 Alteration of Share Capital 165

(iii) Approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act;
(iv) Authorise the company secretary or some other competent officer to issue, on behalf of the Board,
notice of the general meeting as approved by the Board.
5. Soon after the conclusion of the Board meeting, send to the stock exchanges, where the securities of
the company are listed, particulars of such alteration of share capital of the company.
6. Issue notice of the general meeting along with the explanatory statement, to all members, directors and
auditors of the company.
7. Forward three copies of the notice of the general meeting along with the explanatory statement, to the
concerned stock exchanges as per the Listing Agreement.
8. Hold the general meeting and have the resolution (ordinary or special, as the case may be) passed.
(For specimen of the resolution for consolidation of shares, please see Annexure II at the end of this
study).
9. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the
Listing Agreement. (Refer Clause 31 of the Listing Agreement)
10. If the resolution passed is a special resolution, file with the ROC, e-form 23 along with a certified copy of
the resolution, the explanatory statement annexed to the notice of the general meeting at which the
resolution was passed and copy of altered Memorandum of Association and Articles of Association,
within thirty days of the passing of the resolution along with the prescribed filing fee.
11. Give notice in compliance with the provisions of section 95 of the Companies Act, 1956, of the consolidation
of the shares of the company, to the Registrar in e-form 5, within thirty days of the passing of the
resolution, along with the prescribed filing fee specifying the shares consolidated. The Registrar will
record the alteration in the memorandum of the company [Refer Section 97].
12. Forward to the concerned stock exchanges copies of all the notices sent by the company to its members
with respect to the alteration of the conditions in the memorandum of association and six copies (one of
which must be certified) of such amendments to the memorandum of association as soon as they are
adopted by the company in general meeting, as per the Listing Agreements signed with the stock
exchanges.
13. Make necessary changes in all the copies of the memorandum of association of the company lying in
the office of the company so that no unaltered copy is issued to any person.

PROCEDURE FOR SUB-DIVISION OF SHARE CAPITAL


For sub-dividing the share capital of a company, the following procedural steps are required to be taken by the
Board of directors.
1. It must ensure that its articles of association contain a provision authorising it to sub-divide its shares. If
there is no such provision then the articles have to be altered in accordance with the provisions of
Section 31 of the Companies Act, 1956, before proceeding to sub-divide its shares.
2. Give twenty-one days notice of the proposed sub-division of the shares of the company to the stock
exchanges on which the securities of the company are listed. In case of private companies, the notice
period shall be such as prescribed in the Articles.
3. Make an application to the stock exchanges on which the securities of the company are listed and any
other stock exchange on which the company proposes for getting its sub-divided shares listed.
166 PP-ACL&P

4. Convene and hold a Board meeting to


(i) Pass a resolution approving the proposed sub-division of the shares of the company;
(ii) Fix time, date and venue for holding general meeting of the company to pass an ordinary resolution
or a special resolution, if so required by the articles for this purpose [Refer Section 94(2)];
(iii) Approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act;
(iv) Authorise the company secretary to issue, on behalf of the Board, notice of the general meeting as
approved by the Board.
5. Soon after the conclusion of the Board meeting, send to the stock exchanges, where the securities of
the company are listed, particulars of such alteration of share capital of the company.
6. Issue notice of the general meeting along with the explanatory statement, to all members, directors and
auditors of the company.
7. Forward three copies of the notice of the general meeting along with the explanatory statement, to the
concerned stock exchanges as per the Listing Agreement.
8. Hold the general meeting and have the resolution (ordinary or special, as the case may be) passed.
(For specimen of the resolution for sub-division of shares, please see Annexure III at the end of this
Study)
9. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges in case of
a listed company.
10. If the resolution passed is a special resolution, file with the ROC, e-form 23 along with a certified copy of
the resolution, the explanatory statement annexed to the notice of the general meeting at which the
resolution was passed and copy of altered Memorandum of Association and Articles of Association,
within thirty days of the passing of the resolution along with the prescribed filing fee.
11. Give notice in compliance with the provision of Section 95 of the Companies Act, 1956, of the sub-
division of the shares of the company, to the Registrar in e-form 5, within thirty days of the passing of the
resolution, along with the prescribed filing fee specifying the shares sub-divided. The Registrar will
record the alteration in the memorandum of the company [Refer Section 97].
12. Forward to the concerned stock exchanges copies of all the notices sent by the company to its members
with respect to the alteration of the conditions in the memorandum of association and six copies (one of
which must be certified) of such amendments to the memorandum of association as soon as they are
adopted by the company in general meeting, as per the Listing Agreements signed with the stock
exchanges.
13. Make necessary changes in all the copies of the memorandum of association of the company lying in
the office of the company so that no unaltered copy is issued to any person.

CONVERSION OF SHARES INTO STOCK


Section 96 of the Companies Act provides that where a company having a share capital has converted any of its
shares into stock, and given notice of the conversion to the Registrar, all the provisions of this Act which are
applicable to shares only, shall cease to apply as to so much of the share capital as is converted into stock.
Where shares have been fully paid-up, they may be turned into stock and notice of this must be given to the
Registrar [section 95].
The total amount of the share capital is divided into the number of shares. Each share has a fixed value. A share
Lesson 5 Alteration of Share Capital 167

is a fixed unit of value. When a number of shares are converted into a single holding with a nominal value equal
to that of the total value of the shares, it is called conversion of shares into stock. Stock is the aggregate of the
fully paid-up shares legally consolidated and portions of which aggregate may be transferred or split up into
fractions of any amount without regard to the original nominal value of shares.
One of the ways of alteration of Share capital of a company is conversion of shares into stock, and also by re-
conversion of the stock into shares. For example, if 100 shares of ` 10 each are converted into stock of ` 1000,
the holder of 100 shares of ` 10 each will have ` 1,000 stock after the conversion. But the resultant value of `
1,000 is not the face value of the shares or the stock.
Only fully paid shares can be converted into stock. The issue of a partly paid-up stock is void.
The power to convert shares into stock and reconvert stock into shares is conferred on a company by section
94, if authorised by the articles, which power should be exercised by an ordinary resolution.
In either case a notice must be given to the Registrar in e-form No. 5 within thirty days after doing so.
The convenience of stock, besides its divisibility, is that it becomes no longer necessary in a transfer to specify
all the number of various shares comprised in the transfer: a transfer is made of so much stock.

Procedure for Conversion of Fully Paid Shares into Stock


Stock is the aggregate of fully paid shares consolidated in accordance with the provisions of the Companies Act,
1956. Portions of this aggregate may be transferred or split up into fractions of any amount irrespective of the
original nominal value of the shares which have been converted into stock.
A company limited by shares or by guarantee having a share capital, if so authorised by its articles, may alter the
conditions of its memorandum for converting any of its fully paid-up shares into stock or vice versa. When a
number of shares are converted into a single holding with a nominal value equal to that of the total value of the
shares, it is called conversion of shares into stock. It may be noted that no company is authorised to issue stock
directly even against payment of full nominal value in cash. The company must first issue shares which may be
converted into stock only when they are fully paid up.
Section 94(1)(c) authorises a limited company, having a share capital, if so authorised by its articles, to alter the
conditions of its memorandum, that is to say, it may convert all or any of its fully paid-up shares into stock.
Sub-section (2) of Section 94 lays down that the power conferred by the section shall be exercised by the
companyin general meeting and shall not require confirmation by Court.
Section 95 of the Act makes it obligatory on the part of a limited company having share capital, which has
converted any of its fully paid shares into stock , to give notice thereof to the Registrar, within thirty days of the
passing of the resolution, specifying the details of the shares converted into stock and the Registrar shall record
the same in the memorandum of association of the company.
A forged transfer of stock does not affect the title of the stockholder [Davies v. Bank of England (1824) 2 Bingh
363].
A company which proposes to convert any of its fully paid shares into stock has to follow the following procedure:
1. The company has to make sure that its articles of association contain a provision authorising it to
convert its fully paid shares into stock. If there is no such provision then thearticleshavetobe first
altered in accordance withtheprovisionsof Section 31 of the Companies Act, 1956.
2. Give the stock exchanges twenty-one days notice of the proposed conversion of its fully paid shares
into stock [Refer Listing Agreements signed with stock exchanges].
3. Make applications to the stock exchanges on which the securities of the company are listed for listing of
the stock which will come into being as a result of conversion of the fully paid shares into stock.
168 PP-ACL&P

4. Convene and hold a Board meeting to


(i) Pass a resolution in respect of the conversion of fully paid shares of the company into stock.
(ii) Fix time,date and venue for holding ageneral meeting of the company to pass an ordinary resolution
or a special resolution, if so required by the articles for this purpose [Refer Section 94(2)].
(iii) Approve notice and explanatory statement to be annexed to the notice of the general meeting as
per Section 173(2) of the Act.
(iv) Authorise the company secretary to issue notice of thegeneral meeting as approved by the Board.
5. On the conclusion of the Board meeting, send to the stock exchanges, where the securities of the
company are listed, particulars of such alteration to the share capital clause in the memorandum of
association of the company.
6. Issue notice of the general meeting as per provisions of the Companies Act to the members, directors
and auditors of the company. Also forwardthree copies of the notice of the general meeting tothe
concerned stock exchanges as per the Listing Agreement.
7. Hold the general meeting and have the resolution (ordinary or special, as the case may be) passed.
(For specimen of the resolution for conversion of fully paid shares into stock, please see Annexure IV at
the end of this Study).
8. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the
Listing Agreement.
9. If the resolution passed is a special resolution, file with the ROC, e-form 23 along with a certified copy of
the resolution, the explanatory statement annexed to the notice of the general meeting at which the
resolution was passed and copy of altered Memorandum of Association and Articles of Association,
within thirty days of passing of the resolution along with the prescribed filing fee.
10. In compliance with the provisions of Section 95(1) of the Companies Act, 1956, the company should
give notice of conversion of fully paid shares into stock to the Registrar in e-form 5, within thirty days of
passing of the resolution, along with the prescribed filing fee specifying the fully paid shares converted
into stock of the company and the Registrar will record the same in the memorandum of the company
[Refer Section 97].
11. Forward to the concerned stock exchanges copies of all the notices sent by the company to its members
with respect to the alteration of the conditions in the memorandum of association and six copies (one of
which must be certified) of such amendments to the memorandum of association as soon as they are
adopted by the company in general meeting, as per the Listing Agreements signed with the stock
exchanges.
12. Issue necessary stock certificates in exchange of share certificates.
13. Remove the names of the persons from the register of members of the company to whom stock has
been issued in exchange for the shares.
14. Make necessary alterations in all the copies of the memorandum of association of the company lying in
the office of the company so that no unaltered copy is issued to any person.

Effect of conversion of shares into stock


Where a company having a share capital has converted any of its shares into stock, and given notice of the
conversion to the Registrar, all the provisions of this Act which are applicable to shares only, shall cease to apply
on so much of the share capital as is converted into stock.
Lesson 5 Alteration of Share Capital 169

PROCEDURE FOR RE-CONVERSION OF STOCK INTO FULLY PAID SHARES


According to Section 94(1)(c), a limited company, having a share capital, if so authorised by its articles, may
alter the conditions of its memorandum, that is to say, it may re-convert any stock into fully paid-up shares of any
denomination. Sub-section (2) of the Section lays down that the power conferred by this section shall be exercised
by the company in general meeting and shall not require confirmation by Court.
Section 95 of the Act makes it obligatory on the part of a limited company having share capital, which has re-
converted any of its stock into fully paid shares, to give notice thereof to the Registrar, within thirty days of the
passing of the resolution, specifying the stock re-converted into fully paid shares and the Registrar shall record
the same in the memorandum of association of the company.
Broadly the procedural steps are same as discussed in conversion of shares into stock.
(For specimen of the resolution, for re-conversion of stock into shares, please refer Annexure V).

FORFEITURE OF SHARES
To forfeit means to lose the right to, be deprived of; to lose or become liable to lose, as in consequence of fault
or breach of promise or contract. It is a penalty for a breach of contract or neglect; a fine that is imposed for not
complying with the stipulated condition, obligation or duty. For example, in the case of shares of a company, if a
call money payable on a partly-paid share is not paid by a shareholder, the company can forfeit the shares for
the obligation of paying the call money not being fulfilled by the shareholder.
A forfeited share is a partly paid share in a company that the shareholder has to forfeit because he has failed to
pay a subsequent part or final payment; a share to which the right is lost by the shareholder who has defaulted
in paying call money.
The Companies Act, 1956 does not contain any provision in respect of forfeiture of shares in a company. However,
articles of association of almost all the companies contain detailed provisions regulating forfeiture of shares.
These provisions are based on the regulations 29 to 35 in Table A of Schedule I to the Companies Act, 1956 or
recast based on the regulations.
Table A of Schedule I to the Companies Act contains the following regulations in this respect:

Notice for Payment of Call on Defaulting Members


Regulation 29 provides that if a member fails to pay any call, or instalment of a call, on the day appointed for
payment thereof, the Board of directors of the company may, at any time thereafter during such time as any part
of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or
instalment as is unpaid, together with any interest which may have accrued.
Regulation 30 lays down that the notice aforesaid shall
(a) name a further day (not being earlier than the expiry of fourteen days from the date of service of the
notice) on or before which the payment required by the notice is to be made; and
(b) state that, in the event of non-payment on or before the day so named, the shares in respect of which
the call was made will be liable to be forfeited.
Regulation 31 provides that if the requirements of any such notice as aforesaid are not complied with, any share
in respect of which the notice has been given may, at any time thereafter, before the payment required by the
notice has been made, be forfeited by a resolution of the Board to that effect.

Effect of forfeiture
A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but
170 PP-ACL&P

shall, notwithstanding the forfeiture, remain liable to pay to the company all money which, at the date of forfeiture,
were presently payable by him to the company in respect of the shares. The liability of such person shall cease
if and when the company shall have received payment in full and all such moneys in respect of the shares.
[Regulation 33 of Table A].
The only effect of the forfeiture of shares is that the shares pass out of the hands of the holder; the liability
incurred prior to forfeiture of shares to pay the allotment and call money still remains.

Procedure for forfeiture of shares


1. A forfeiture of any share must be done on the authority of the Board of Directors or, of a Committee of
the Board if authorised by articles of association for the purpose, by its resolution. The resolution should
provide for a notice to be given to the shareholder concerned before the forfeiture is actually effected in
pursuance of the resolution, requiring payment of so much of the call as is unpaid, together with any
interest which may have accrued. (For specimen of the Board Resolution for serving of notice on defaulting
members for payment of call money, please see Annexure VI)
2. The notice threatening forfeiture in pursuance of the Board resolution must be given in accordance with
the provisions of the articles. The notice aforesaid shall:
name a further day (not being earlier than the expiry of fourteen days from the date of service of the
notice) on or before which the payment required by the notice is to be made; and
state that, in the event of non-payment on or before the day so named, the shares in respect of
which the call was made will be liable to be forfeited.
3. The notice must:
specify clearly the amount payable on account of unpaid call money as well as interest accrued, if
any, and other expenses.
mention the day on or before which the amount specified ought to be paid, not be earlier than 14
days from the date of service of the notice.
contain an unambiguous statement to the effect that in the event of failure to pay the specified
amount latest on the appointed day, the shares in respect of which the amount remains unpaid
would be liable to be forfeited. (for specimen of the notice to defaulting member to pay unpaid call or
installment, please see Annexure VII).
4. The notice threatening forfeiture as contemplated in regulation 29 of Table A must be served in accordance
with the provisions of section 53 of the Companies Act.
5. If the call money is not paid in response to such notice threatening forfeiture, the company may, at any
time thereafter, before the payment required by the notice has been made, forfeit the shares by a
resolution of the Board to that effect. (For specimen of the Board Resolution forfeiting shares, please
see Annexure VIII & IX)
6. It is common practice to publish a notice of forfeiture in newspapers so that the members of the public
are made aware of the forfeiture and cautioned not to deal in the forfeited shares.
7. A further notice after the shares are forfeited is not necessary. However, it is advisable and a common
practice to give a notice of the shares having been forfeited to the concerned shareholders by registered
post.
8. Regulation 34 of Table A provides for a verified declaration in writing to be issued under the signature of
a director, manager or secretary of the company that a share in the company has been duly forfeited on
a date stated in the declaration. The declaration so made shall be conclusive evidence of the facts
Lesson 5 Alteration of Share Capital 171

stated therein as against all persons claiming to be entitled to the shares forfeited. The accidental non-
receipt of notice of forfeiture by the defaulter is not a ground for relief against forfeiture regularly effected.
9. The fact of the forfeiture will be entered in the Register of Members and the name of the concerned
shareholder as a member of the company will be deleted from the register.
10. Notify the Stock Exchange at which the securities of the Company are listed about such forfeiture of
shares.

Sale, etc. of Forfeited Shares


A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board may
resolve.
(For specimen of the Board resolution approving sale of the forfeited shares, please see Annexure X at the end
of this study).
However, at any time before sale or disposal of the forfeited shares, the Board may, at its absolute discretion,
pass a resolution cancelling or rescinding the forfeiture of the shares on such terms as it thinks fit [Refer Regulation
32].
Regulation 33 lays down that a person whose shares have been forfeited shall cease to be a member in respect
of the forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company all moneys
which, at the date of forfeiture, were presently payable by him to the company in respect of the shares. The
liability of such person shall cease if and when the company shall have received payment in full of all such
moneys in respect of the shares.

CANCELLATION OF SHARES
According to clause (e) of Sub-section (1) of Section 94 of the Companies Act, 1956, a limited company having
a share capital may, if so authorised by its articles, cancel its shares which, at the date of the passing of the
resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of
its share capital by the amount of the shares so cancelled.
Sub-section (2) of Section 94 of the section lays down that the powers conferred by this section shall be exercised
by the company in general meeting and shall not require confirmation by court.
A cancellation of shares in pursuance of this section shall not be deemed to be a reduction of share capital
within the meaning of the Companies Act. In fact, this is known as diminution of share capital. [Refer Section
94(3)].
Here the cancellation of shares means cancellation of shares of a particular unissued class of shares and not
the paid up share capital.
Section 95(1) of the Act makes it obligatory on the part of a limited company having share capital, which has
cancelled any share capital, to give notice thereof to the Registrar, within thirty days of the passing of the
resolution, specifying the shares cancelled and the Registrar shall record the same in the memorandum of the
company. Sub-section (2) of this section says that the Registrar shall thereupon record the notice, and make
any alterations which may be necessary in the companys memorandum or articles or both.

Procedure for Cancellation of Shares


1. To ensure that the articles of association of the company contain a provision authorising it to cancel its
shares. In the absence of such a provision, the articles have first to be altered in accordance with the
provisions of Section 31 of the Companies Act, 1956.
172 PP-ACL&P

2. Convene and hold a Board meeting to

(i) decide and pass a resolution in respect of the scheme of cancellation of shares of the company;
(ii) fix time, date and venue for holding general meeting (extraordinary or annual) of the company to
pass an ordinary resolution or a special resolution, if so required by the articles for this purpose;

(iii) approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act; and

(iv) to authorise the company secretary or any other competent officer of the company to issue notice of
the general meeting on behalf of the Board of directors of the company.

3. On the conclusion of the Board meeting, send to the stock exchanges, where the securities of the
company are listed, particulars of such cancellation of the shares of the company.

4. Issue notice of the general meeting as per provisions of the Companies Act to all the members, directors
and auditors of the company.

Also forward three copies of the notice of the general meeting along with the explanatory statement
annexed to the notice to the concerned stock exchanges as per the Listing Agreement.

5. To hold the general meeting and have the resolution (ordinary or special, as the case may be) passed.

(For specimen of the resolution for cancellation of shares, please see Annexure XI at the end of this
study)
6. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the
Listing Agreement.

7. If the resolution passed is a special resolution, file with the ROC, e-form 23 along with a certified copy of
the resolution and the explanatory statement annexed to the notice of the general meeting at which the
resolution was passed, within thirty days of the passing of the resolution along with the prescribed filing
fee, for registration of the resolution as per Section 192.

8. In compliance with the provision of Section 95(1) of the Companies Act, 1956, the company should give
notice of cancellation of shares to the Registrar in e-form 5, within thirty days of the passing of the
resolution, along with an amended copy of the Memorandum & Articles of Association of the Company
and the prescribed filing fee specifying the shares cancelled. Under Sub-section (2) of Section 95, the
Registrar shall record the notice and make any alterations which may be necessary in the companys
memorandum or articles or both. (Specimen e-form 5 alongwith mandatory attachments is given in the
CD provided along with the Study Material or at the link http://www.mca.gov.in/MCA21/Download_e-
Form_choose.html)

Where stamp duty is not paid electronically, the company shall submit the original stamped copy of e-form 5
at the ROC Office for registration together with the amended copy of the Memorandum and Articles of
Association.

9. Forward to the concerned stock exchanges, six copies (one of which must be certified) of such
amendments to the memorandum of association as soon as they are adopted by the company in general
meeting, as per the Listing Agreements signed with the stock exchanges.

10. Make necessary changes in all the copies of the memorandum of association of the company lying in
the office of the company so that no unaltered copy is issued to any person.
Lesson 5 Alteration of Share Capital 173

SURRENDER OF SHARES
Surrender means to hand over; relinquish possession of, especially on compulsion or demand. The Companies
Act does not contain any provision on surrender of shares. Table A in the First Schedule also does not give
power to a company to accept surrender of its shares; it contains no regulation on this subject.
But articles usually empower the companies to accept surrender of shares. For specimen of article, please see
Annexure XII at the end of the Study.
There is difference between surrender and forfeiture of shares. There is no reference in the Act to surrender of
shares; but these have been admitted by the courts, upon the principle that they have practically the same effect
as forfeiture, the main difference being that one is a proceeding against an unwilling party and the other a
proceeding taken with the assent of the shareholder who is unable to retain and pay future calls on the shares.
Surrender is voluntary and forfeiture is due to breach of contract.
The surrender is good if it amounts to forfeiture. It is not open to a shareholder to surrender his shares at will,
especially when he has to meet future calls, and it is not open to the company to accept a surrender of shares
unless the act of the company can be brought within the rule relating to forfeiture of shares.
The Act permits forfeiture of shares on certain grounds; but to give an unlimited and wide power to a company
to accept surrender of shares is opposed to the principle that a company cannot buy its own shares and to the
principle that a company can reduce its capital only with the permission of the court and on such terms and
conditions as the court may impose.
A surrender of shares releasing the shareholder from further liability in respect of the shares, is equivalent to a
purchase of the shares by the company, and is therefore illegal and null and void. Thus, a surrender of shares is
not valid merely because the articles of the company authorise the Board to accept surrender of shares, unless
it can be shown that the surrender took place in circumstances, which would have justified a forfeiture.
There can be no valid surrender of shares that are not fully paid except where shares are lawfully forfeited, as it
involves reduction of capital requiring the sanction of the court. A surrender of shares amounts to a reduction of
capital, which is unlawful unless sanctioned by the court.
Where a companys articles give the directors power to accept a surrender of shares, this power will be recognised
as valid if it is used merely to avoid the formalities of forfeiture. Subject to the provisions allowing companies to
acquire their own shares, a company cannot accept a surrender if the shares are not liable to forfeiture, so that
such a surrender of partly paid shares would not relieve the shareholder from his uncalled liability; such a
surrender would amount to an unauthorised purchase by the company of its own shares, or a reduction of
capital without the courts sanction, and is invalid. It is, however, valid to accept the surrender of partly paid
shares from an insolvent member and discharge liability for future calls thereon, if this represents bona fide
compromise of the companys on him. The effect of a valid surrender is the same as forfeiture, provided the
articles authorise it.
It is doubtful whether a company may accept a surrender of fully paid shares in exchange for the issue by the
company of an equivalent nominal amount of fully paid shares.
Also there is a difference between surrender of shares and purchasing by a company of its own shares. A
company cannot make any payment or give any valuable consideration for the surrender. This is because a
surrender of shares in consideration of a payment in money or moneys worth by the company is a purchase by
it of its own shares and is ultra vires that is to say, unless confirmed by the court as a reduction of capital.
Like forfeiture, surrender also does not involve any payment out of the funds of the company. If the surrender
were made in consideration of any such payment it would be neither more nor less than a sale, and open to the
same objections as purchase by the company of its own shares. If it were accepted in a case when the company
was in a position to forfeit the shares, the transaction would be perfectly valid.
174 PP-ACL&P

However, surrender of shares to the company for consideration may be valid if the circumstances are very
special, e.g. where the surrender is part of a compromise.
As noted earlier, section 77(1) prohibits a public company or a private company which is a subsidiary company
from buying its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance
of sections 100 to 104 or of section 402. Purchase by a public company or a private company which is a
subsidiary of a public company, of its own shares is a reduction of capital, and is, therefore unlawful, unless the
provisions applicable to the reduction are complied with, unless the case falls within the purview of section 77A.
A valid surrender of shares would not amount to buying by a company of its own shares.

REDUCTION OF SHARE CAPITAL


Sub-section (1) of Section 100 of the Companies Act, 1956 lays down procedure for reduction of share capital. A
company limited by shares or a company limited by guarantee and having a share capital may, subject to confirmation
by Court*, if so authorised by its articles, reduce its share capital in any way, by special resolution, and may
(i) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;
(ii) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share
capital which is lost, or is unrepresented by available assets; or
(iii) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share
capital which is in excess of the wants of the company,
and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of
its shares accordingly.
On analysing the provisions of Section 100 of the Act, we find the following factors have to be taken care of in
effecting reduction in the share capital of a company:
(i) Authority contained in the articles of the company.
(ii) Passing of a special resolution by the company.
(iii) Confirmation of the reduction by Court*.
The term Court means the High Court having jurisdiction in the State where the registered office of the company
is situated.
Reduction of capital is permissible under the Act in the following way:-
(i) Diminishing the nominal amount of shares so as to leave a less sum unpaid;
(ii) Diminishing the nominal amount of any shares by writing off or repaying paid up share capital;
(iii) Diminishing the nominal amount by combining (i) & (ii);
(iv) Diminishing the number of shares by extinguishing the existing liability on certain shares/writing off or
repaying the whole amount paid up thereon and canceling them.
In Elpro International Ltd., In re [(2009) 149 Com Cases 646 (Bom)], the brief facts of the case were that the
company proposed to extinguish and cancel 8,89,169 shares held by shareholders constituting 25 per cent, of
the issued and paid up share capital and return capital to such shareholders at `183 per equity share of `10
each so cancelled and extinguished in accordance with section 100 of the Act. According to the scheme as
approved by the shareholders, the reduction of 25 percent, of the issued and paid up capital was to take place
from amongst 3,835 share holders which included 112 shareholders who voted for the resolution, and 3,723
shareholders who did not object to the resolution. As equity shares of the company were listed with the Bombay
Stock Exchange and Pune Stock Exchange it filed a draft of the proposed petition with the stock exchanges. The

* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come into effect.
Lesson 5 Alteration of Share Capital 175

company presented a petition under section 101 of the Companies Act, 1956, seeking confirmation of reduction
of the share capital of the company. The Bombay stock Exchange raised objections, inter alia, that (i) the share
holders who did not cast their votes in the course of the postal ballot were being treated as if they had accepted
the proposed scheme, the reduction of share capital of the company should be either applicable to all the
shareholders or to only those shareholders who had specifically agreed to the reduction of share capital and (ii)
the closing price of the shares was considerably higher than the exit price being offered to the shareholders.

The objections were overruled


Reasons stated were that a selective reduction of share capital is legally permissible. It had not been disputed
before the court by the parties that the votes of those shareholders who had obtained from casting their ballots
in support of the scheme, were not required to be taken into account in determining whether the resolution was
passed by the requisite statutory majority. The shareholders who did not cast their votes were those who had
abstained from voting at the meeting. 3723 shareholders who did not object to the scheme by casting their votes
were not counted towards the votes required to approve the decision to reduce per se. The assumption made on
account of abstention in respect of the persons who did not vote was only in respect of the mechanism of
reduction. Therefore, it was not a case where the company had assumed that such persons who abstained from
voting were in favour of the resolution that was resolved per se. Consequently, the question as to whether such
abstention could be assumed to be in favour of the resolution would not arise in the facts of the case.
The material placed on record provided data of the share price movements. The price of ` 183 per share was
well above the price at which the shares of the company were traded on the date on which the resolution was
passed by the board of directors. The speculative variation in the price of the shares of the company would not
operate to invalidate a resolution which had been validly passed. Moreover, there was no objection from any of
the shareholders to the proposed reduction.
Where the object of reduction was to extinguish the holding of non-promoter shareholders on payment of fair
value for their shares and reduction was approved by a majority of equity shareholders including majority of
non-promoter shareholders, the reduction was sanctioned. [Sandvik Asia Ltd.v. Bharat Kumar Padamsi, (2009)
151 Com Cases 251: (2010) 2 Com LJ 255 (Bom).

Procedure for reduction of share capital


In view of the aforesaid provisions of the Act, a company proposing to reduce its share capital is required to take
the following procedural steps:
1. Ensure that its articles of association contain a provision authorising it to reduce its share capital. If
there is no such provision then the articles have to be first altered in accordance with the provisions of
Section 31 of the Companies Act, 1956.
2. Convene and hold a Board meeting to
(i) approve the scheme of capital reduction by a resolution;
(ii) fix time, date and venue for holding a general meeting of the company for passing a special resolution
for reduction of share capital subject to confirmation by Court* as per provisions of Section 100 of
the Act and for altering the capital clause in the memorandum of association of the company, as a
consequence of reduction in the share capital of the company;
(For specimen of the special resolution for reduction of share capital, please see Annexure XIII at
the end of this study).
(iii) approve notice, agenda and explanatory statement to be annexed to the notice of the general
meeting as per Section 173(2) of the Act; and

* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come into effect.
176 PP-ACL&P

(iv) authorise the company secretary or some other competent officer to issue notice of the general
meeting as approved by the Board.
3. Soon after the conclusion of the Board meeting, send to the stock exchanges, where the securities of
the company are listed, particulars of the proposed reduction in the share capital of the company.
4. Issue notice of the general meeting to all members, directors and auditors of the company. Also send
three copies of the notice of the general meeting to the stock exchanges where the securities of the
company are listed.
5. Hold the general meeting and have the special resolution(s) passed.
In Siel Ltd., In re. [(2008) 144 Com Cases 469 (Del)], reduction of capital was discussed that the petitioner
company proposed to reduce its share capital to an amount of ` 24, 63, 86, 251 by canceling its equity
share capital of ` 49, 31, 21, 830, which amount was to be credited to the general reserve account of the
company. The reduction was approved by a special resolution passed in accordance with Section 189
of the Companies Act, 1956, at an extraordinary general meeting. The reduction was in accordance with
the articles of association of the company. The reduction of share capital was pursuant to a scheme of
amalgamation approved by an overwhelming majority of the shareholders and creditors of the company.
The Central Government raised no objection to the proposed reduction of share capital.
The Petition was allowed. The reasons as stated are outlined in the following para:-
Reduction of the share capital of a company is a domestic concern of the company and the decision
of the majority would prevail. If the majority by special resolution decides to reduce the share capital
of the company, it has the right to decide to reduce the share capital of the company; it has the right
to decide how this reduction should be effected. While reducing the share capital, the company can
decide to extinguish some of its shares without dealing in the same manner with all other shares of
the same class. A selective reduction is permissible within the framework of law for any company
limited by shares.
The shareholders and the creditors of the company had approved the scheme including the reduction of
share capital and none were affected by the scheme. There had been no unfair or inequitable transaction.
There was no legal impediment or valid reasons for not accepting the proposed scheme of cancellation
and reduction of share capital. The resolution and the form of minutes proposed to be registered under
Section 103(1)(b) of the Act for reduction of share capital of the company were to be approved.
6. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the
Listing Agreement.
7. File e-form 23 along with a certified true copy of the special resolution(s), copy of explanatory statement
under Section 173 and copy of altered Memorandum of Association and Articles of Association with the
ROC within thirty days of the passing of the resolutions along with the prescribed filing fee for its registration
under Section 192 of the Act.
8. Apply to Court for confirmation of the capitalreduction by way of a petition in Form No.18 of the Companies
(Court) Rules, 1959 [Refer Rule 11 of the said Rules].
9. The petition must be accompanied by an application by summons to the judge in chambers for directions
as to the advertisement of the petition, the notices to be served and the proceedings to be taken.
10. The petition must be verified by an affidavit in Form No. 3 of the said Rules [Refer Rule 21 of the
Companies (Court) Rules].
11. The petition should be accompanied by the following documents:
(a) A certified true copy of the memorandum and articles of association of the company.
Lesson 5 Alteration of Share Capital 177

(b) A certified true copy of the notice of the general meeting together with the explanatory statement
annexed to the notice, at which the special resolution had been passed.
(c) A certified true copy of the special resolution authorising the reduction of capital.
(d) A certified true copy of the latest audited balance sheet and profit and loss account of the company
together with all the schedules and other papers attached/annexed thereto.
(e) A certified true copy of the minutes of proceedings at the general meeting at which the special
resolution was passed.
12. Publish an advertisement of the petition not less than fourteen days before the date fixed for hearing in
one issue of the Official Gazette of the State or the Union Territory concerned and in one issue each of
a daily newspaper in English language and a daily newspaper in the regional language circulating in the
concerned State or Union Territory if the Judge so directs on receiving the petition.
13. The directions, if any, given by the Judge are to be adhered to with regard to:
(a) the proceeding to be taken for setting the list of creditors entitled to object including the dispensing
with the observance of the provisions of Section 101(2) of the Companies Act, 1956 as regards any
class or classes of creditors;
(b) fixing the date with reference to which the list of creditors entitled to object including the dispensing
with the observance of the provisions of Section 101(2) of the Companies Act, 1956 as regards any
class or classes of creditors;
(c) fixing the date with reference to which the list of such creditors is to be made out;
(d) the publication of notice; and
(e) generally fixing the time for and giving directions as to all other necessary or proper steps in the
matter.
14. A list of creditors in Form No. 21 of the Companies (Court) Rules, 1959, made out by an officer of the
company competent to make the same should be filed by the company within the time allowed by the
Judge. The list should contain the particulars as enumerated in Rule 49 of the Companies (Court)
Rules, 1959. Copies of such list shall be kept at the registered office of the company and at the office of
the advocate for the company, and any person desirous of inspecting the same, may, at any time, during
the ordinary business hours, inspect and take extracts from the same on payment of the sum of one
rupee.
15. The list of creditors should be verified by an affidavit made by an officer of the company competent to
make the same. The affidavit should be in Form No. 22 with such variations as circumstances of the
case may require [Rule 50 of the Companies (Court) Rules, 1959].
16. Within 7 days after the filing of the list of creditors or such further time as the Judge may allow, the
company should send to each creditor a notice of presentation of the petition and the said list. The
notice should contain the particulars as are enumerated in Rule 52 of the Companies (Court) Rules,
1959.
17. According to Rule 53, notice of the presentation of the petition and of the list of creditors in Rule 49
should within 7 days after the filing of the said list or such further time as Judge may allow, be advertised
by the company in the manner prescribed by the Judge. The notice should be in Form No. 24 of the
Rules.
18. The company should also, as soon as may be, file an affidavit proving the despatch and the publication
of the notices referred to in Rules 52 and 53, in Form No. 25 of the Rules.
178 PP-ACL&P

19. Within the time fixed by the Judge, the company should also, according to Rule 55, file a statement
signed and verified by the advocate of the company stating the result of the notices mentioned in the
Rules 52 and 53.
20. The advocate of the company has to prepare the result of settlement of the list of creditors in the form of
certificate which is to be signed by the Judge. Such certificate should contain the parts as enumerated
in Rule 58.
21. After the expiry of not less than 14 days from the filing of the certificate mentioned above, petition will be
set down for hearing. Notice of the hearing of the petition has to be advertised in Form No. 29 of the
Rules, in such time and in such newspapers as the Judge may direct.
22. At the hearing of the petition the Judge may give such directions as he may deem proper with reference
to securing in the manner mentioned in Section 101(2)(c) of the Act, the debts or claims of any creditors
who do not consent to the proposed reduction, and the further hearing of the petition may be adjourned
to enable the company to comply with such directions.
23. Before confirming reduction of capital, the Court* will satisfy itself that the interest of the creditors and
different classes of shareholders, if any, are not affected adversely by the said reduction of capital.
Where the Court* makes an order confirming reduction, it may also make an order, for any special
reason, directing the company to add to its name as the last words thereof, the words and reduced
during such period commencing on or at any time after the date of its order and also require the company
to publish the reasons for the reduction of such other information in regard thereto, as it thinks proper. If
the Judge makes an order directing the company to publish the reasons for the reduction or such other
information in regard thereto, the company should comply with the same as per Rule 64.
24. The order of the Court* confirming the reduction of capital and approving the minutes shall be in Form
No. 30 of the Rules with such authorisation as may be necessary.
25. File e-form 21 prescribed in the Companies (Central Governments) General Rules and Forms
(Amendment) Rules, 2006 with the Registrar.
26. Deliver to the Registrar, a certified copy of the order of the Court* confirming the reduction of the share
capital of the company and of the minute approved by the Court* and produce before him, if so required,
the original copy of the order. The Registrar will register the copy of the order and the minute and will
certify the same under his hand.
On the registration of the order and the minute, the resolution for reducing share capital as confirmed by
the order, shall take effect. The minutes when registered shall be deemed to be substituted for the
corresponding part of the memorandum of the company, and shall be valid and alterable as if it had
been originally contained therein.
27. Publish the notice of registration in such manner as the Court* directs.
28. Make necessary alteration in the records of the company, on all stationery items, share certificates,
blank forms of share certificates lying in the office of the company and all copies of the memorandum
and articles of association of the company lying in the office of the company..
29. Take all other steps in accordance with the scheme of reduction of share capital of the company as
approved by the Court, e.g. to pay-up share capital which is in excess of the wants of the company.
30. The company must send to the concerned stock exchanges in case of listed company three copies of all
the notices, circulars etc. issued and/or published in newspapers by the company in connection with the
reduction of the share capital of the company as per the Listing Agreements signed with the stock exchanges.
* It shall be replaced by the National Company Law Tribunal (NCLT) when the provisions of the Companies Bill, 2012 come into effect.
Lesson 5 Alteration of Share Capital 179

ANNEXURES
ANNEXURE I
SPECIMEN OF ORDINARY RESOLUTION FOR INCREASING THE AUTHORISED SHARE CAPITAL OF
THE COMPANY
RESOLVED THAT pursuant to Section 94 and other applicable provisions, if any, of the Companies Act,
1956 and Article ... of the Articles of Association of the company, the Authorised Share capital of the company
be and is hereby increased from ` 50,00,000 (Rupees fifty lakh) divided into 5,00,000 (five lakh) equity
shares of ` 10 each to ` 5,00,00,000/- (Rupees five crore) divided into 50,00,000 (fifty lakh) equity shares of
` 10 (Rupees ten) each by creation of 45,00,000 equity shares of ` 10 each ranking pari passu in all respect
with the existing equity shares.
(Note: If the Articles of Association prescribe that a special resolution is required for increase of authorized share
capital, pass the resolution as a special resolution.)
Explanatory Statement
The directors of the company have feltthat for profitable working of the company, the company needs more
funds in the form of equity share capital. The present authorised share capital of the company is only ` 50,00,000
(Rupees fifty lakhs) divided into 5,00,000 (five lakh) equity shares of ` 10/- (Rupees ten) each and the entire
authorised share capital has been issued, subscribed and paid up. The Board,therefore, decided that the
authorised share capital of the company be increased to ` 5,00,00,000 (Rupees five crore) divided into 50,00,000
(fifty lakh) equity shares of ` 10/- (Rupees ten) each.
Hence the proposed resolution is recommended for consideration of and approval by the shareholders of the
company.
None of the directors is concerned or interested in the proposed resolution.
ANNEXURE II
SPECIMEN OF THE RESOLUTION FOR CONSOLIDATION OF SHARES
(1) Ordinary Resolution
RESOLVED THAT
(i) pursuant to Section 94(1)(b) and other applicable provisions, if any, of the Companies Act, 1956, and
Article... of Articles of Association of the company, all the 5,00,00,000 (five crore) equity shares of ` 5
(Rupees five) each of the company be and are herebyconsolidatedinto two crore and fifty lakh
(2,50,00,000) equity shares of ` 10/- (Rupees ten) each;
(ii) all the present shareholders holding in all 2,00,00,000 (two crore) issued, subscribed and fully paid
equity shares of ` 5 (Rupees five) each be issued, in lieu of their present shareholding, the number of
fully paid consolidated equity shares of ` 10 (Rupees ten) each;
(iii) the Board of directors of the company be and is hereby authorised to take all the necessary steps for
giving effect the foregoing resolution, including recall of the existing share certificates, issue of new
share certificates in lieu of the existing issued share certificates in terms of the foregoing resolutions
and in accordance with the applicable provisions of the Companies Act, 1956 and those of the Companies
(Issue of Share Certificates) Rules, 1960.
(2) Special Resolution
RESOLVED THAT as a consequence of consolidation of the equity shares of the company, clause V (share
capital clause) of the memorandum of association of the company be and is hereby substituted with the following:
180 PP-ACL&P

V. The authorised share capital of the company is ` 25,00,00,000 (Rupees twenty-five crore) divided into two
crore and fifty lakh (2,50,00,000) equity shares of ` 10/- (Rupees ten) each.
Explanatory Statement
In order to maintain uniformity in the nominal value of the companys equity shares with the nominal value of
equity shares of other companies, the Board of directors of the company, at its meeting held on ............. resolved
to take steps for consolidation of the companys equity shares of ` 5/- (Rupees five) each into shares of ` 10/-
(Rupees ten) each.
Therefore, the proposed resolutions are commended to the shareholders of the company for their consideration
and approval.
The directors of the company are interested in the proposed resolutions to the extent of their respective
shareholdings in the company.
ANNEXURE III
SPECIMEN OF THE RESOLUTION FOR SUB-DIVISION OF SHARES
(1) Ordinary Resolution
RESOLVED THAT
(i) pursuant to Section 94(1)(d) and other applicable provisions, if any, of the Companies Act, 1956, and
Article... of Articles of Association of the company, all the 5,00,000 (five lakh) equity shares of ` 100
(Rupees hundred) each of the company be hereby sub-dividedinto fifty lakh (50,00,000) equity shares
of ` 10/- (Rupees ten) each;
(ii) all the present shareholders holding in all 2,00,000 (two lakh) issued, subscribed and fully paid equity
shares of ` 100 (Rupees hundred) each be issued, in lieu of their present shareholding, the number of
fully paid consolidated equity shares of ` 10 (Rupees ten) each of the aggregate value equal to the
amount paid by each shareholder on his/her existing fully paid equity shares of ` 100/- (Rupees hundred)
each;
(iii) the Board of directors of the company be and is hereby authorised to take all the necessary steps for
giving effect the foregoing resolution, including recall of the existing share certificates, issue of new
share certificates in lieu of the existing issued share certificates in terms of the foregoing resolutions
and in accordance with the applicable provisions of the Companies Act, 1956 and those of the Companies
(Issue of Share Certificates) Rules, 1960.
(2) Special Resolution
RESOLVED THAT as a consequence of sub-divison of the equity shares of the company, clause V (share
capital clause) of the memorandum of association of the company be and is hereby substituted with the
following:
V. The authorised share capital of the company is ` 5,00,00,000 (Rupees five crore) divided into fifty lakh
(50,00,000) equity shares of ` 10/- (Rupees ten) each
Explanatory Statement
In order to maintain uniformity in the nominal value of the companys equity shares with the nominal value of
equity shares of other companies, the Board of directors of the company, at its meeting held on ............. resolved
to take steps for sub-division of the companys equity shares of ` 100/- (Rupees hundred) each into equity
shares of ` 10/- (Rupees ten) each.
Therefore, the proposed resolutions are commended to the shareholders of the company for their consideration
and approval.
Lesson 5 Alteration of Share Capital 181

The directors of the company are interested in the proposed resolutions to the extent of their respective
shareholdings in the company.
ANNEXURE IV
SPECIMEN OF THE RESOLUTION FOR CONVERSION OF SHARES INTO STOCK
(1) Ordinary Resolution
RESOLVED THAT
(i) pursuant to Section 94(1)(c) and other applicable provisions, if any, of the Companies Act, 1956, and
Article .............. of Articles of Association of the company, out of the total authorized share capital of ` 10
Crore, 10,00,000 (ten lakh) fully paid equity shares of ` 10 (Rupees ten) each of the company bearing
distinctive Nos. 1 to 10,00,000 (both inclusive), be and are hereby converted into stock;
(ii) all the shareholders of the shares bearing distinctive Nos.1 to 10,00,000 be and are hereby authorised
to surrender their share certificates to the company and obtain from the company stock certificates of
the desired value, on an application addressed to the Board of directors of the company at the companys
registered office;
(iii) the Board of directors of the company be and is hereby authorised to take all the necessary steps for
giving effect the foregoing resolutions, including recall of the existing share certificates, issue, on specific
requests from the shareholders, of stock certificates in lieu of the surrendered share certificates in terms
of the foregoing resolutions and removal of the names of those shareholders from the register of members
of the company, who surrender their share certificates and desire to have stock issued in lieu thereof.
(2) Special Resolution
RESOLVED THAT consequent upon conversion of equity shares of the company into stock , clause V (share
capital clause) of the memorandum of association of the company be and is hereby substituted with the
following:
V. The Authorised Share Capital of the Company is ` 10,00,00,000 (Rupees ten crore) divided into ninety
lakh (90,00,000) equity shares of ` 10/- (Rupees ten) each and stock of the aggregate value of `
1,00,00,000/- (Rupees one crore)
Explanatory Statement
Members of the company holding shares bearing distinctive Nos. 1 to 10,00,000 (inclusive) have requested the
company for the issue of stock in lieu of the shares held by them in the company. They have made the request
on the ground that handling stock is easier than shares, for which they are required to keep a number of share
certificates in safe custody and every time they transfer certain shares or buy certain shares they have to send
share transfer forms and the relevant share certificates and other related documents to the company involving
the risk of their being lost/pilfered in transit. This process also involves long delays on account of the unending
paper work in the companys office.
Responding to the demand of the members, the Board of directors of the company, at their meeting held
on.......................... considered the matter in detail and eventually resolved to accede to the request of the
members of the company and passed the necessary resolution to bring the matter before the shareholders of
the company for their consideration and approval, with or without modifications.
Therefore, the proposed resolution is before the shareholders of the company for their consideration and approval.
None of the directors of the company is concerned or interested in the proposed resolution.
182 PP-ACL&P

ANNEXURE V
SPECIMEN OF THE RESOLUTION FOR RE-CONVERSION OF STOCK INTO SHARES
(1) Ordinary Resolution
RESOLVED THAT
(i) pursuant to Section 94(1)(c) and other applicable provisions, if any, of the Companies Act, 1956, and
article ............ of articles of association of the company, stock of the aggregate value of ` 1,00,00,000/
- (Rupees one crore) be and is hereby converted into 10,00,000 (ten lakh) fully paid equity shares of `
10 (Rupees ten) each of the company bearing distinctive Nos. 1 to 10,00,000 (both inclusive) thereby
increasing the number of equity shares in the authorised share capital clause (Clause V) of the companys
memorandum of association by ten lakh equity shares of ` 10/- (Rupees ten) each and deleting the
stock of the aggregate value of ` 1,00,00,000/- (Rupees one crore) from the share capital clause (Clause
V) of the memorandum of association of the company;
(ii) all the stockholders of the aggregate value of ` 1,00,00,000/- (Rupees one crore) be and are hereby
authorised to surrender their stock certificates to the company and obtain from the company share
certificates to the extent of the nominal value of the stock held by them, on an application addressed to
the Board of directors of the company at the companys registered office;
(iii) the Board of directors of the company be and is hereby authorised to take all the necessary steps for
giving effect to the foregoing resolution, including recall of the existing stock certificates, issue, on
specific requests from the stockholders, share certificates in lieu of the surrendered stock certificates in
terms of the foregoing resolutions and entry in the register of members of the company, of the names of
those stockholders, who surrender their stock certificates and desire to have shares issued in lieu
thereof.
(2) Special Resolution
RESOLVED THAT consequent upon re-conversion of stock into fully paid equity shares of the company,
clause V (share capital clause) of the memorandum of association of the company be and is hereby substituted
with the following:
V. The authorised share capital of the company is ` 10,00,00,000 (Rupees ten crore) divided into one
crore (One crore) equity shares of ` 10/- (Rupees ten) each
Explanatory Statement
On .......... the company had issued stock of the aggregate value of ` 1,00,00,000/- (Rupees one crore) to the
shareholders who had held 10,00,000 (ten lakh) fully paid equity shares of ` 10/- (Rupees ten) each of the
company.
All the stockholders of the company have now requested the company for re-conversion of their stock into fully
paid equity shares of ` 10/- (Rupees ten) each of the company.
In response to the demand of the stockholders, the Board of directors of the company, at their meeting held on
........................ considered the matter in detail and eventually resolved to accede to the request of the stockholders
of the company and passed the necessary resolution to bring the matter before the shareholders of the company
for their consideration and approval, with or without modifications.
Therefore, the proposed resolutions are before the shareholders of the company for their consideration and
approval.
None of the directors of the company is concerned or interested in the proposed resolution.
Lesson 5 Alteration of Share Capital 183

ANNEXURE VI
SPECIMEN OF BOARD RESOLUTION FOR SERVING NOTICE REQUIRING A DEFAULTING MEMBER TO
PAY CALL OR INSTALLMENT THEREOF WITHIN STIPULATED TIME
RESOLVED THAT
(i) notice be given in accordance with articles..... and........ of the Articles of Association of the company to
all those members of the company, who have not paid the second call amount (as per list placed on the
table and initialled by the chairman of the meeting for the purpose of identification ) on equity shares
held by them in the company till the ..... day of ........ 2013...., which date was fixed and notified for
payment of the call, calling upon them to pay such call amount on or before the ........ day of ........ 2013
together with interest at the rate of ........ per cent per annum from the following day of the said date ........
upto the date of actual payment and stating that in the event of non-payment of the call money on or
before the said date, the shares will be liable to forfeiture; and
(ii) Shri Company Secretary, be and is hereby authorised to serve, at the earliest possible date,
the notice on the defaulting members of the company in terms of the foregoing resolution by registered
post with acknowledgement due.
ANNEXURE VII
SPECIMEN OF THE NOTICE TO A DEFAULTING MEMBER REQUIRING HIM TO PAY CALL OR
INSTALLMENT THEREOF WITHIN STIPULATED PERIOD OF TIME
Name of the Company
Regd.Off. Address
Ref. No............................ Dated ....................
Registered with AD
Shri ..................................
Dear Sir/Madam,
Subject: Notice requiring to pay the second call of ` ............. per share due on equity shares of the
company allotted to you.
Pursuant to Articles .............and ...... of the Articles of Association of the company, and on the authority of the
resolution of the Board of directors of the company passed at its meeting held on............, notice was given to
you requiring you to pay the second call of ` ...... on all partly paid equity shares of the company, on or before the
. Day of ..2013, but the said amount has till the date of this notice remained unpaid.
Under the authority of the Board of directors of the company, we hereby call upon you to pay the said second call
of ` ........... per share on ........ equity shares held by you in the company on or before .........and in the event of
non-payment on or before the day so named, the shares in respect of which the call was made will be liable to
be forfeited.
We trust you will honour your obligation under the Articles of Association of the company within the stipulated
time.
Thanking you,
Yours faithfully
for ........................................... Limited
(Company Secretary)
184 PP-ACL&P

ANNEXURE VIII
SPECIMEN OF BOARD RESOLUTION FORFEITING SHARES FOR NON-PAYMENT OF CALL ON EQUITY
SHARES
RESOLVED THAT pursuant to Article........ of the Articles of Association of the company, the undermentioned
equity shares in the capital of the company be and are hereby forfeited for non-payment of the second and
final call of ` ........ per share payable on or before.... 2013, of which due notice was served upon the
defaulting members on ........ 2013 by registered post with acknowledgement due:
No. of Shares Dist. Nos. Names of the Registered Holders

ANNEXURE IX
DRAFT RESOLUTION FOR FORFEITURE OF SHARES ON NON-PAYMENT OF ALLOTMENT MONEY AS
PER FINAL NOTICE
The Board was informed that pursuant to the resolution passed in the meeting of the Board of directors held on
21.10.2012, Final Notice for payment of Allotment Money dated 21.10.2012 (a copy was placed on the table)
was sent to 2489 shareholders of the company by registered post for payment of Allotment Money on 74880
equity shares allotted on conversion of 14% Secured Fully Convertible Debentures of ` 120/- each and 5,50,909
Rights equity shares. 2431 shareholders have not complied with the requirements of this final notice i.e. not
remitted the outstanding Allotment Money due on the shares allotted to and held by them, on or before the last
date of 21.11.2012 fixed for the purpose and even till 31.12.2012. No Allotment Money was outstanding on
shares held by the directors/ promoters of the company.
Two lists of such shareholders were placed on the table and brief summary was given hereunder.
Details of shares and shareholders:
No. of No. of Allotment Money Due (`)
Shareholders Shares Capital Premium Total
` ` `
487 69,032 3,35,520.00 6,71,040.00 10,06,560.00
1,944 5,45,589 27,26,401.00 40,89,601.50 68,16,002.50
Article 66 of the Articles of Association of the Company provides that if the requirements of such notice as
aforesaid are not complied with in respect of the shares for which such notice was given, such shares shall be
forfeited by a resolution of the Board of directors. Such forfeiture shall include all dividends declared but not
actually paid on such forfeited shares before forfeiture.
Pursuant to Article 67 a notice of the resolution forfeiting the shares shall be given to such shareholders and an
entry of the forfeiture with the date thereof shall be made in the Register of Members forthwith.
As per Article 68, the forfeited shares shall be deemed to be the property of the company and such forfeited
shares may be sold or issued or otherwise disposed off in such manner as the directors shall approve. However,
pursuant to Article 75, the directors may annul forfeiture of any share(s) before disposal thereof.
RESOLVED that pursuant to the provisions of Article 66 of the Articles of Association of the Company and
consequent upon the shareholders having not complied with the requirements of the Final Notice for Payment
of Allotment Money dated 21.10.2012 sent under registered post i.e. not remitted the Allotment Money due on
such equity shares together with interest on or before 21.11.2009, the last date fixed for payment, the 69,032
equity shares of ` 10/- each allotted on 23rd July, 2010 and 23rd January, 2011 on conversion of 14%
Lesson 5 Alteration of Share Capital 185

Secured Fully Convertible Debentures of ` 120/- each in terms of the prospectus dated 28.10.2012 and the
5,45,589 equity shares of ` 10/- each allotted on 23.7.2010 on Rights basis in terms of the Letter of Offer
dated 29.4.2009 as per particulars whereof contained in the two lists placed on the table, be and are hereby
forfeited.
RESOLVED further that necessary entry, as required under Article 67 of the Articles of Association of the
Company be made in the Register of members and the notice of this resolution of forfeiture be sent to the
such members individually under registered post and be notified to the Stock Exchanges at Mumbai, Kolkata,
Delhi and Kanpur where the equity shares of the company are listed and that Mr. ........................, President
(Finance) and Mr. .........................., Company Secretary be and are hereby authorised severally to sign and
send requisite notice and to do all acts, deeds and things in connection therewith or incidental thereto.
ANNEXURE X
SPECIMEN OF BOARD RESOLUTION APPROVING SALE OF FORFEITED SHARES
RESOLVED THAT ........ equity shares of ` ......... each bearing Distinctive Nos......... to ........., both inclusive,
previously registered in the name of Shri.............. and forfeited on............... as per declaration duly signed by
the Company Secretary and placed on the table, be and are hereby sold to Shri............. for ` ....... per
share and that, upon payment of that sum, an equity share certificate of equity shares credited with `
....... paid-up per share be issued to the said Shri...................... accordingly.
ANNEXURE XI
SPECIMEN OF THE SPECIAL RESOLUTION FOR CANCELLATION OF SHARES
RESOLVED THAT pursuant to Section 94(1)(e) and other applicable provisions, if any, of the Companies
Act, 1956, and article.... of the articles of association of the company, the authorised share capital of the
company be and is hereby reduced from ` 20,00,00,000/- (Rupees twenty crore) divided into 2,00,00,000
(Two crore) equity shares of ` 10/- (Rupes ten) each to ` 10,00,00,000 (Rupees ten crore) divided into one
crore (1,00,00,000) equity shares of ` 10/- (Rupees ten) each by cancelling one crore (1,00,00,000) equity
shares of ` 10/- (Rupees ten) each, which have not been taken or agreed to be taken by any person and
consequently Clause V (share capital clause) of the memorandum of association of the company be and is
hereby substituted with the following:
V. The authorised share capital of the company is ` 10,00,00,000 (Rupees ten crore) divided into one
crore (1,00,00,000) equity shares of ` 10/- (Rupees ten) each.
Explanatory Statement
The company was incorporated on .......... with an authorised share capital of ` 20,00,00,000/- (Rupees twenty
crore) divided into 2,00,00,000 (Two crore) equity shares of ` 10/- (Rupes ten) each. The present issued,
subscribed and paid-up share capital of the company is ` 7,00,00,000/- (Rupees seven crore) divided into
70,00,000 (Seventy lakh) equity shares of ` 10/- (Rupees ten) each. The company has no proposal at hand
which would require additional capital. The Board of directors of the company, at its meeting held on ............ had
resolved to reduce the authorised share capial of the company by cancelling one crore (1,00,00,000) equity
shares of ` 10/- (Rupees ten) each, which have not been taken or agreed to be taken by any person. Therefore,
the proposed special resolution is before the shareholders of the company for their consideration and approval.
None of the directors of the company is interested in the proposed resolution.
ANNEXURE XII
SPECIMEN OF REGULATION IN ARTICLES REGARDING SURRENDER OF SHARES
The Directors may, subject to the provisions of the Act, accept a surrender of any shares from or by any member
desirous of surrendering them on such terms as they think fit.
186 PP-ACL&P

The phrase surrender of shares means the surrender to the company on the part of the registered holder of the
shares already issued. Power to surrender shares does not include power to renounce newly issued shares. A
shareholder whose shares are forfeited ceases to be a member but a shareholder who surrenders his shares
does not cease to be a member and can, therefore, be put on the list of contributories.
The Board may accept a surrender of shares and will have to approve it by its resolution. If the Board decides to
reissue the surrendered shares, the Board will also give approval to the reissue or delegate that power to any
director or officer of the company. The same procedure as in the case of reissue of forfeited shares will be
followed.
ANNEXURE XIII
SPECIMEN OF THE SPECIAL RESOLUTION FOR REDUCTION OF SHARE CAPITAL OF A COMPANY
RESOLVED THAT
(i) pursuant to Section 100 and other applicable provisions, if any, of the Companies Act, 1956, article
............... of articles of association of the company and subject to confirmation by the High Court* at
.......... and subject to such other approvals, consents, permissions or sanctions of any other authority,
body or institution (hereinafter collectively referred to as the concerned authorities) as may be required,
and subject to such other conditions or guidelines, if any, as may be prescribed or stipulated by any of
the concerned authorities, from time to time, while granting such approvals, consents, permissions or
sanctions,the subscribed, issued and paid up equity share capital of the company be reduced from `
50,00,00,000 (Rupees fifty crore) divided into 5,00,00,000 (Five crore) equity shares of ` 10 each to `
25,00,00,000 (Rupees twenty-five crore) divided into 5,00,00,000 (Five crore) equity shares of ` 5 each,
and the surplus amount, i.e., ` 25,00,00,000 (Rupees twenty-five crore) , being in excess of the wants
of the company be paid to the shareholders.
Explanatory Statement
As the members are aware, the company has a cash surplus which has resulted from the recent restructuring
including merger of the erstwhile ...... Ltd. with the company. The Board is of the view that the present economic
environment in the country is not conducive to expansion or diversification. The Board of directors of the company
discussed the matter in detail at its meeting held on ........ and resolved to return the surplus cash to the members
in recognition of their dedication, consistency and utmost faith reposed by them in the management of the
company.
Hence the proposed special resolution is for consideration of and approval by the members of the company.
Directors of the company are interested in the proposed resolution to the extent of their respective shareholdings
in the company.
Lesson 5 Alteration of Share Capital 187

LESSON ROUND-UP
Section 94 deals with different modes of alteration of share capital of a company as specified in
clauses (a) to (e) of sub-section (1). Any of these modes of alteration of share capital must be authorised
by the articles of the company. In the absence of an express provision in the articles, no alteration of
the capital in any of the specified modes can be done. It should therefore, be ensured, before embarking
upon passing of a resolution to alter the capital, that there is an express provision in the articles
authorizing the company to alter its share capital.
The alteration of share capital in any of the ways specified above requires an ordinary resolution to be
passed at a general meeting of the company, unless the Articles otherwise provide
A company may alter its share capital by consolidation or division of all or any of its shares into shares
of larger denominations than its existing shares. To consolidate means to bring together (separate
parts) into a single or unified whole.
A company may sub-divide its share capital if so authorised by articles of association. It is done by an
ordinary resolution passed at a general meeting. Sub-division is the method by which the nominal
value of each share is reduced to a smaller amount. For example one share of ` 100 may be sub-
divided into 10 shares of ` 10 each. However the total amount of authorised share capital remains
unaltered. Such a change is commonly called a share split. It is made by a company to widen the
ownership of its shares.
When a number of shares are converted into a single holding with a nominal value equal to that of the
total value of the shares, it is called conversion of shares into stock. Stock is the aggregate of the fully
paid-up shares legally consolidated and portions of which aggregate may be transferred or split up
into fractions of any amount without regard to the original nominal value of shares.
A forfeited share is a partly paid share in a company that are forfeited because the shareholder has
failed to pay a subsequent part or final payment; a share to which the right is lost by the shareholder
who has defaulted in paying call money.
A limited company having a share capital may, if authorized by articles, cancel the shares. Cancellation
of shares means cancellation of shares of a particular unissued class and not the paid up share
capital.
Surrender means to hand over; relinquish possession of, especially on compulsion or demand. The
Companies Act does not contain any provision on surrender of shares.
A company limited by the shares or a company limited by guarantee and having share capital can if
authorised by its articles, by special resolution and subject to confirmation by the High Court on petition
reduce its share capital. If the articles do not contain any provision for reduction of capital, the articles
must first be altered so as to give the power. In exercising its power the court will have due regard to
the interests of creditors, who may consent or object to the reduction.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Write the Board resolution/resolution in General Meetings for:
(a) increasing the authorised share capital of the company
(b) for consolidation of shares
(c) for forfeiture of shares
188 PP-ACL&P

2. Draft a board resolution for sale of forfeited shares.


3. Explain the procedure for conversion of fully paid shares into stock.
4. Explain the procedure for cancellation of shares.
5. What are the different modes of altering share capital of a company? State the procedure for reduction
of share capital of a company.
Lesson 6 Issue and Redemption of Debentures and Bonds 189

Lesson 6
Issue and Redemption of Debentures and Bonds

LESSON OUTLINE
LEARNING OBJECTIVES
Meaning of debenture
Issue of debentures is a popular method of
Kinds of debentures raising funds by companies through borrowing.
It helps companies to raise funds with lower
Debenture trust deed and its drafting
interest and longer redemption period. For the
Appointment and duties of debenture investors, it gives a minimum fixed interest and
trustees return of investment. Debentures can issued
through private placement/rights issue/public
Liability of company to create security and
issue. Further debentures may convertible or
Debenture Redemption Reserve
non-convertible.
Debenture Redemption Reserve
Further, there is a fundamental difference
Issue of Debentures between the capital made available to a
company by issue of shares and by the money
Important aspects under SEBI (Issue and
obtained by a company under a loan or issue of
Listing of Debt Securities) Regulations,
debentures. Respective incidences and
2008 relating to non-convertible
consequences of issuing a share and borrowing
debenture
money on loan or on a debenture are different
Issue of Convertible Debt Instruments and distinctive. A debenture holder as a creditor
has a right to sue the company, whereas a
Private placement of debt securities
shareholder has no such right. A debenture, in
SEBI (Public Offer and Listing of the widest definition, is an acknowledgment of
Securitised Debt Instruments) an existing debt. A debenture-holder as such is
Regulations, 2008 not a member, but a creditor of the company.

Conversion of debentures or loans into After going through this lesson, students will be
shares able to understand the practical and procedural
aspects relating to issuing of debentures and
Issue of Public Sector Bonds
bonds, creation of security, drafting of debenture
LESSON ROUND-UP trust deed, redemption of debentures and
conversion of debentures into shares etc.
SELF TEST QUESTIONS

189
190 PP-ACL&P

DEBENTURES
Section 2(12) of the Companies Act, 1956 defines debenture as follows: Debenture includes debenture stock,
bonds and any other securities of a company, whether constituting a charge on the assets of the company or
not. Under clause (45 AA) of section 2 inserted by the Companies Amendment Act, 2000, the term security
carries the same meaning as is assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956
which inter alia includes debentures and debenture stock. Debenture is a document evidencing a debt or
acknowledging it and any document which fulfills either of these conditions is a debenture.
The important features of a debenture are:
1. It is issued by a company as a certificate of indebtedness.
2. It usually indicates the date of redemption and also provides for the repayment of principal and payment
of interest at specified date or dates. Debenture interest is normally payable whether or not the company
earns profits.
3. It usually creates a charge on the undertaking or the assets of the company. In such a case the lenders
of money to the company enjoy better protection as secured creditors, i.e. if the company does not pay
interest or repay the principal amount, the lenders may either directly or through the debenture trustees
bring action against the company to realise their dues by sale of the assets/undertaking earmarked as
security for the debt However, it is not necessary that debentures should create a charge.
Debentures are issued in the following forms:
(a) Naked or unsecured debentures.
(b) Secured debentures.
(c) Redeemable debentures.
(d) Perpetual debentures.
(e) Bearer debentures.
(f) Registered debentures.
Their features are as follows:
(a) Naked or unsecured debentures: Debentures of this kind do not carry any charge on the assets of
the company. The holders of such debentures do not therefore have the right to attach particular
property by way of security as to repayment of principal or interest. If the issuer defaults in the repayment
of principal or payment of interest, the investor has to be along with the unsecured creditors of the
company.
(b) Secured debentures: Debentures that are secured by a mortgage of the whole or part of the assets of
the company are called mortgage debentures or secured debentures. The mortgage may be one duly
registered in the formal way or one which is secured by the deposit of title deeds in case of urgency. If
the issuer defaults in the repayment of principal or payment of interest, his assets can be sold to repay
the liability to the investors.
(c) Redeemable debentures: Debentures that are redeemable on expiry of a fixed period are called
redeemable debentures. Such debentures after redemption can be reissued in accordance with the
provisions of Section 121.
(d) Perpetual debentures: If the debentures are issued subject to redemption on the happening of specified
events which may not happen for an indefinite period, e.g. winding up, they are called perpetual
Lesson 6 Issue and Redemption of Debentures and Bonds 191

debentures. Perpetual debentures is an hybrid instrument that blends the features of debt and equity.
Such instruments could be inherently riskier than other debt obligations.
(e) Bearer debentures: Such debentures are payable to bearer and are transferable by mere delivery. The
name of the debenture holder is not registered in the books of the company, but the holder is entitled to
claim interest and principal as and when due. A bona fide transferee for value is not affected by the
defect in the title of the transferor. Bearer debentures are transferable by delivery. [CIT vs. Chowringhee
Properties Ltd. (1944) 14 Com Cases 201 (Cal)]
(f) Registered debentures: Such debentures are payable to the registered holders whose names appear
on the debenture certificate/letter of allotment and is registered on the Companys register of debenture
holders maintained as per Section 152 of the Act.

KINDS OF DEBENTURES
Debentures may be of different kinds which are as follows:
1. Redeemable Debentures: Debentures are generally redeemable, that is to say, they are issued on the
terms that the company is bound to repay the amount of the debenture, either at a fixed date, or upon
demand, or after notice, or under a system of periodical drawings. Redeemable debentures can be re-
issued. This power is expressly given by Section 121. This section provides that unless any contrary
provision is contained in the articles or in the conditions of issue or unless there is a resolution showing
an intention to cancel the redeemed debentures, the company has power to re-issue the same debentures
or issue other debentures in their place. The person who has been re-issued the debentures shall have
the same rights and priorities as if the debentures had never been redeemed.
2. Perpetual or Irredeemable Debentures: A Debenture in which no time is fixed for the company to pay
back the money, although it may pay back at any time it chooses, is an irredeemable debenture. The
debenture holder cannot demand payment as long as the company is a going concern and does not
make default in making payment of the interest. But all debentures, whether redeemable or irredeemable
become payable on the company going into liquidation.
3. Registered and Bearer Debentures: Registered debentures are made out in the name of a particular
person, whose name appears on the debenture certificate and who is registered by the company as
holder on the Register of debenture holders. Such debentures are transferable in the same manner as
shares by means of a proper instrument of transfer duly stamped and executed and satisfying the other
requirements specified in Section 108 of the Act. Bearer debentures, on the other hand, are made out to
bearer, and are negotiable instruments, and so transferable by mere delivery like share warrants. The
person to whom a bearer debenture is transferred become a holder in due course and unless contrary
is shown, is entitled to receive and recover the principal and the interest accrued thereon. [Calcutta
Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Com Cases 1063].
4. Secured and unsecured or Naked Debentures: Where debentures are secured by a mortgage or a
charge on the property of the company, they are called secured debentures. Where they are not secured
by any mortgage or charge on any property of the company they are said to be naked or unsecured
debentures.
5. Convertible Debentures: Where the debentures are convertible, partly or wholly, into the shares of a
company after a specified time, either as a result of exercise of option or in terms of the issue, they are
called convertible debentures.
Based on convertibility, debentures can be classified under three categories:
1. Fully Convertible Debentures (FCDs).
192 PP-ACL&P

2. Non Convertible Debentures (NCDs).


3. Partly Convertible Debentures (PCDs).
1. Fully Convertible Debentures (FCDs): These are convertible into equity shares of the company with or without
premium as per the terms of the issue, on the expiry of specified period or periods. If the conversion is to take
place at or after eighteen months from the date of allotment but before 36 months, the conversion is optional on
the part of the debenture holders in terms of SEBI Guidelines. Interest will be payable on these debentures upto
the date of conversion as per terms of the issue.
2. Non Convertible Debentures (NCDs): These debentures do not carry the option of conversion into equity
shares and are therefore redeemed on the expiry of the specified period or periods.
3. Partly Convertible Debentures (PCDs): These may consist of two kinds namely - convertible and non-convertible.
The convertible portion is to be converted into equity shares at the expiry of specified period. However, the non
convertible portion is redeemed at the expiry of the stipulated period. If the conversion takes place at or after 18
months, the conversion is optional at the discretion of the debenture holder.
The distinctions between fully convertible and partly convertible debentures are
Characteristics Partly convertible debentures Fully convertible debentures
Suitability Better suited for companies with Better suited for established track record
companies without
established track record
Capital base Relatively lower equity capital on Higher equity capital on conversion of
conversion of debentures debentures
Flexibility in financing Favourable debt equity ratio Highly favourable debt equity ratio
Classification for Convertible portion classified Classified as equity for debt-equity as equity
debt-equity ratio and non-convertible computation portion as
computation debt
Popularity Not so popular with investors Highly popular with investors
Servicing of equity Relatively lesser burden of equity Higher burden of servicing of equity
servicing

3. DEBENTURE TRUST DEED AND ITS DRAFTING


Trust is an arrangement enabling property to be held by a person or persons (the trustees) for the benefit of
some other person or persons (the beneficiaries). The trustee is the legal owner of the property but the beneficiary
has an equitable interest in it. Trust deed is a written instrument legally conveying property to a trustee often for
the purpose of securing a loan or mortgage. It is the document creating and setting out the terms of a trust. It will
usually contain the names of the trustees, the identity of the beneficiaries and the nature of the trust property, as
well as the powers and duties of the trustees.
It constitutes trustees charged with the duty of looking after the rights and interests of the debenture holders.
The debenture holders can, through the trustees, enter and sell the property comprised in the security.
Section 117A of the Companies Act, 1956, provides that :-
(1) A trust deed for securing any issue of debentures shall be in such form and shall be executed within
such period as may be prescribed.
(2) A copy of the trust deed shall be open to inspection to any member or debenture holder of the company and
he shall also be entitled to obtain copies of such trust deed on payment of such sum as may be prescribed.
Lesson 6 Issue and Redemption of Debentures and Bonds 193

(3) If a copy of the trust deed is not made available for inspection or is not given to on demand by, any
member or debenture holder, the company and the officer of the company who is in default shall be
punishable for each offence, with fine which may extend to five hundred rupees for every day during
which the offence continues.
A trust deed is one of several instruments required to be executed to secure redemption of debentures and
payment of interest on due dates. The trust deed should be in the form and be executed within such period as
may be prescribed. Besides, the SEBI (Debenture Trustees) Regulations, 1993 are applicable to the listed
companies. The aforesaid Regulations provide that a debenture trustee should be registered with SEBI by
obtaining a certificate of registration in accordance with the conditions provided therein. The aforesaid Regulations
inter alia provide procedure for registration, responsibilities and obligations of debenture trustees and also
prescribe contents of trust deed.
Under Section 119 of the Act, trustees of the trust deed for debentureholders are made liable for breach of trust
where they do not exercise due care and diligence required of them as trustees. Therefore, any term in the trust
deed which exempts the trustee from his liability to indemnify for breach of trust is void and has no legal effect.

Contents of a debenture trust deed


The trust deed lays down what the consequences of certain events are, e.g. appointment of a receiver and the
trustees, who are usually also given direct powers of interference, if the security is in jeopardy, powers such as
the right to appoint a receiver to look after the property, to enter into possession and to carry on the business of
the company. There is usually an agreement called Trustee Agreement. Specimen Debenture trust deed is
placed as Annexure II at the end of the study.
Under Companies Act, the main terms of the trust deed are:
(a) an undertaking by the company to pay the debenture holders' principal and interest;
(b) clauses giving the trustees of the deed a legal mortgage over the company's freehold and leasehold
(as has been agreed) property and a floating charge over the rest of the company's undertaking and
property;
(c) clauses specifying the events which will cause the security to be enforceable, usually such events as
default in payment of principal or interest, a winding-up petition presented or ordered, appointment of a
receiver, breach of any undertaking by the company, de facto cessation of business;
(d) a clause giving trustees the power to take possession of the property charged when the security becomes
enforceable. This is usually accompanied by powers to carry on the business or sell the property charged
and distribute any proceeds to the debenture holders in settlement of any outstanding debts and remit
any remainder to the company. Powers are usually included in the deed permitting the trustees to enter
into arrangements regarding the property with the company;
(e) Registers of debenture holders, meetings of debenture holders and such administrative matters are
also usually included in the deed.
Under SEBI Regulations, the main terms of the trust deed are:
According to regulation 14 of the Securities and Exchange Board of India (Debenture Trustees) Regulations,
1993, a debenture trust deed should contain, amongst others, the matters specified in Schedule IV to the
Regulations namely:
(a) Preamble
(b) Description of instruments
(c) Details of Charged Securities (Existing or future):-
194 PP-ACL&P

Nature of charge, examination of title.


Rank of charge of assets viz. first, second, pari passu, residual, etc.
Charging of future assets.
Time limit within which the future security for the issue of debentures shall be created as specified
in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Enforceability of securities, events under which security becomes enforceable.
Obligation of company not to create further charge or encumbrance of the trust property without
prior approval of the trustee.
Minimum security cover required.
Provision for subsequent valuation.
Circumstances when the security will become enforceable.
Method and mode of preservation of assets charged as security for debenture holders.
Circumstances specifying when the security may be disposed off or leased out with the approval of
trustees.
Procedure for allowing inspection of charged assets, books of accounts, by debenture trustee or
any person or persons authorised by it.
(d) Events of defaults:-
This section shall clearly define the event of default which if occurs shall invite the actions by debenture
trustee. This section shall also contain the steps which shall be taken by debenture trustee in the event
of defaults.
(e) Rights of debenture trustees:-
This section shall inter alia provide that:
(i) Debenture trustee is entitled to inspect the registers of the company and to take copies and extracts
thereof;
(ii) Debenture trustee has a right to appoint a nominee director.
(f) Obligations of the company:-
This section shall inter alia state the following with respect to companys duties:
(i) to maintain Register of debenture holders with addresses with record of subsequent transfers and
changes of ownership.
(ii) to keep proper books of account open for inspection by debenture trustee.
(iii) to furnish whatever required information to debenture trustee including copies of reports, balance
sheets, profit and loss accounts etc.
(iv) to keep charged property/security adequately insured and in proper condition.
(v) to permit debenture trustee to enter and inspect the state and condition of charged assets.
(vi) to pay all taxes, cesses, insurance premia with respect to charged property/security, on time.
(vii) to inform debenture trustee before declaring or distributing dividend.
(viii) to comply with all guidelines/directions issued by any Regulatory authority, with respect to the instant
debenture issue.
Lesson 6 Issue and Redemption of Debentures and Bonds 195

(ix) to create debenture redemption reserve as per the SEBI (Issue of Capital and Disclosure
Requirement) Regulations, 2009 and the provisions of Companies Act and submit an auditors
certificate to the trustee.
(x) to convert the debentures into equity in accordance with the terms of the issue, if applicable.
(xi) to inform debenture trustee about any change in nature and conduct of business by company
before such change.
(xii) to keep the debenture trustee informed of all orders, directions, notices, of court/Tribunal affecting
or likely to affect the charged assets.
(xiii) to inform debenture trustee of any major change in composition of its Board of Directors, which may
amount to change in control as defined in SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011.
(xiv) to submit any such information, as required by the debenture trustee.
(xv) fee or commission of debenture trustees.
(xvi) obligation to inform debenture trustee about any change in nature and conduct of business by the
body corporate before such change.
(xvii) obligation of the body corporate to forward a quarterly report to debenture trustees containing the
following particulars:
(a) updated list of the names and addresses of the debenture holders;
(b) details of interest due but unpaid and reasons thereof;
(c) the number and nature of grievances received from debenture holders and resolved by the
body corporate;
(d) a statement that the assets of the body corporate which are available by way of security are
sufficient to discharge the claims of the debenture holders as and when they become due.
(g) Miscellaneous
Procedure for appointment and removal of trustee including appointment of new trustees.
Provision that the debenture trustee shall not relinquish from its assignment unless another debenture
trustee has been appointed.
Procedure to remove debenture trustee by debenture holders providing for removal on a resolution
passed by at least 75% of the total debenture holders of a body corporate.
Provisions for redressal of grievances of debenture holders.
Note: The debenture trustee may incorporate additional clauses, provided that the additional clauses do not
dilute or contravene the provisions of above clauses.

Execution of trust deed and stamp duty


The following provisions of the Registration Act and the Stamp Act are relevant:
(a) In the case of English Mortgage, the mortgage deed or the trust deed will attract 'ad valorem' stamp
duty. After execution, such deeds will also have to be registered with the Sub-registrar of Assurances.
Therefore, in addition to the stamp duty, registration charges will also have to be paid.
(b) Under section 30(2) of the Registration Act, 1908, the Registrar of Delhi District has been empowered,
at his discretion, to receive and register any document registerable under that Act, without regard to the
situation in any part of India of the property to which the document relates.
196 PP-ACL&P

(c) For the purpose of registration of a document in Delhi the document should first be got 'adjudicated'
from the Collector of Stamps in Delhi, then the stamp duty should be paid there and the document
registered.
(d) If the stamp duty payable on the document in the State where the property is situate is more than the
duty payable in Delhi, the difference in duty will have to be paid in the State concerned within 3 months.
(e) Once the stamp duty is paid on the debenture trust deed, no more stamp duty is required to be paid on
the debenture certificate which in such a case can be issued without affixing any stamp thereon.
(f) In the case of equitable mortgage if no document, deed, note, memorandum, etc. is signed then nothing
is required to be registered with the Sub-registrar of Assurances. If, however, such a note, memorandum,
letter regarding deposit of title deeds is made or written, then it will attract stamp duty, e.g. Article 6 of the
Bombay Stamp Act, 1958. Such a note, letter, memorandum, deed, etc., duly stamped may have to be
registered with the Sub-registrar of Assurances. In that case, no further stamp duty may have to be paid
on the debenture certificate.
According to article 27 of Schedule to the Indian Stamp Act, 1899, the stamp duty at the rates specified therein
is payable on 'debenture' (whether a mortgage debenture or not) being a marketable security by endorsement
or by a separate instrument of transfer or by delivery.
In terms of the exemption clause to Article 27, where a mortgage is created by a registered mortgage deed, i.e.,
English mortgage, no further stamp duty will be payable on 'debenture' under the said article 27. The object of
the exemption is that duty should be payable only once. If it is paid on the mortgage deed, no duty is necessary
on the separate debentures issued in conformity with it. This provision is intended for the benefit of limited
companies, and does not apply to private persons or proprietors of estates, issuing debentures. Such debenture
issuers will be responsible not only for the payment of the duty on the mortgage but also for the payment of the
additional duty which is required for debentures.
Having regard to the distribution of legislative powers under the Constitution, State Stamp Laws do not impose
any duty on debentures, except in Jammu & Kashmir and West Bengal. Moreover, where the debenture trust
deed creates a charge by way of a mortgage, whether English mortgage or equitable mortgage, the amount of
stamp duty payable thereon will have to be determined having regard to the provisions of the Stamp Act of the
State in which the trust deed is executed.
A debenture trust deed is not in itself a mortgage or a bond. It is simply a deed of trust by which all lenders to the
company put their trust upon anyone selected by them for the purpose of watching their interests and realising
their security. Therefore, it has to be stamped only as a trust deed and not as a mortgage or a bond. Chief
Controlling Revenue Authority vs. State Bank of Mysore, AIR 1988 Kant 1, 7, 8, 10 : (1989) 65 Com Cases 427
(FB).

APPOINTMENT AND DUTIES OF DEBENTURE TRUSTEES


Section 117B was inserted by Companies (Amendment) Act, 2000. As per this Section, no company shall issue
a prospectus or a letter of offer to the public for subscription of its debentures, unless the company has, before
such issue, appointed one or more debenture trustees for such debentures and the company has, on the face
of the prospectus or the letter of offer, stated that the debenture trustee or trustees have given their consent to
the company to be so appointed.
Provided that no person shall be appointed as a debenture trustee, if he
(a) beneficially holds shares in the company;
(b) is beneficially entitled to moneys which are to be paid by the company to the debenture trustee;
(c) has entered into any guarantee in respect of principal debts secured by debentures or interest thereon.
Lesson 6 Issue and Redemption of Debentures and Bonds 197

The functions of the debenture trustees shall generally be to protect the interest of holders of debentures (including
the creation of securities within the stipulated time) and to redress the grievances of holders of debentures
effectively [Sub-section (2)]
The duties of a debenture trustee have been described in detail in Regulation 15 of the SEBI (Debenture
Trustees) Regulations, 1993. In the appointment of a Debenture trustee, the above conditions are required to be
borne in mind. Where the company is a listed company, the company has to comply with SEBI Regulations.

LIABILITY OF COMPANY TO CREATE SECURITY AND DEBENTURE REDEMPTION RESERVE


Section 117C was inserted by the Companies (Amendment) Act, 2000. According to this section
(1) Where a company issues debentures after the commencement of this Act, it shall create a debenture
redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited,
from out of its profits every year until such debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve shall not be utilised by the company except
for the purpose aforesaid.
(3) The company referred to in Sub-section (1) shall pay interest and redeem the debentures in accordance
with the terms and conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity, the Company Law Board1/
Tribunal2 may, on the application of any or all the holders of debentures shall, after hearing the parties
concerned, direct, by order, the company to redeem the debentures forthwith by the payment of principal
and interest due thereon.
(5) If default is made in complying with the order of the Company Law Board1/Tribunal2 under Sub-section
(4), every officer of the company who is in default, shall be punishable with imprisonment which may
extend to three years and shall also be liable to a fine of not less than five hundred rupees for every day
during which such default continues.
The debenture redemption reserve is required to be created for both, accrued and unaccrued debentures. In the
case of partly-paid debentures, Debenture Redemption Reserve is to be created for non-convertible portion
only.

DEBENTURE REDEMPTION RESERVE (DRR)


(A) Section 117C of the Act requires every company to create a DRR to which adequate amount shall be
credited out of its profits every year until such debentures are redeemed and shall utilize the same exclusively
for redemption of a particular set or series of debentures only. There is no obligation on the part of the company
to create DRR if there is no profit for that particular year.
Vide Circular No. 11/02/2012-CL-V(A) dated 11.02.2013, the Ministry of Corporate Affairs has clarified as under:
(i) No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve
Bank of India and banking companies for both public as well as privately placed debentures. For other
Financial Institutions (FIs) within the meaning of Section 4A of the Companies Act,1956, DRR will be as
applicable to NBFCs registered with RBI.
(ii) For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment Act), 1997, the adequacy
of DRR will be 25% per cent of the value of debentures issued through public issue as per present SEBI

1. Existing
2. Proposed
198 PP-ACL&P

(Issue and Listing of Debt Securities) Regulations, 2008 and no DRR is required in the case of privately
placed debentures.
(iii) For other companies including manufacturing and infrastructure companies, the adequacy of DRR will
be 25 per cent of the value of debentures issued through public issue as per present SEBI(Issue and
Listing of Debt Securities) Regulations, 2008 and also 25% DRR is required in the case of privately
placed debentures by listed companies. For unlisted companies issuing debentures on private placement
basis, the DRR will be 25 per cent of the value of debentures.
(iv) Every company required to create/maintain DRR shall before the 30th day of April of each year, deposit
or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its
debentures maturing during the year ending on the 31st day of March next following in any one or more
of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses(a) to (d) and (ee) of the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under clause (f) of section
20 of the Indian Trusts Act, 1882;
(v) The amount deposited or invested, as the case may be, above shall not be utilized for any purpose
other than for the repayment of debentures maturing during the year referred to above, provided that
the amount remaining deposited or invested, as the case may be, shall not any time fall below 15
percent of the amount of debentures maturing during the 31st day of March of that year.
The Circular issued in response to the need for development of corporate bonds/debentures, does not state any
specific amount of DRR to be maintained by housing finance companies (HFCs) registered with National Housing
Bank (NHB). It provides an exemption to privately placed issues of debentures by NBFCs registered with RBI
only. However, the HFCs which are registered with the NHB will not get any exemption and accordingly, the
Circular intends to treat HFCs at par with the Non Banking Non Financial Companies (NBNCs) and hence,
HFCs will also be required to maintain a DRR of 25% of the value of debentures in case of their public as well as
privately placed issues of debentures.
(B) Section 117C will apply to debentures issued and pending to be redeemed and as such DRR is required to
be created for debentures issued prior to 13th December 2000 and pending redemption subject to clarifications
issued herein.
(C) Section 117C will apply to non-convertible portion of debentures issued whether they are fully or partly
convertible.

ISSUE OF DEBENTURES
The power to issue debentures is usually set out in the Articles of Association. The debentures can be issued in
the same manner as shares in a company. But unlike shares, they can be issued at a discount without any
restriction, if articles so authorise, since they do not form part of the share capital of the Company. They can also
be issued at a premium. The Companies Act, 1956 places no restriction in this regard. Interest payable on them
is a debt and can be paid out of capital. There is no ceiling, minimum or maximum, for the rate of interest payable
on debentures. Any rate of interest, though justifiable, can be paid on the debentures. Even zero rate of interest
debentures can be issued. In the case of unsecured debentures which amount to be deposits, the rate of
interest should be within the maximum limit prescribed by the Rules.
All sums allowed by way of discount must be stated in every balance sheet of the company until written-off.
Lesson 6 Issue and Redemption of Debentures and Bonds 199

Section 122 of the Act provides that specific performance of a contract to give debentures may be enforced by
an order of the Court against the company and that the company may specifically enforce against anyone an
agreement to take debentures.
No company is permitted to issue debentures carrying voting rights at any general meeting of the company.
There is no restriction upon issue of debentures at a discount. The effect of a discount is that it amounts to an
additional interest. [Webb vs. Shropshire Rly. Co., (1893) 3 Ch 307 (CA)]. Debentures may be issued at a
discount but such debentures may not be made convertible into equity shares unless they are made legal by
fulfillment of the conditions prescribed for issuing shares at a discount vide section 79.
Where payment for debentures was to be made by instalments and on the debentureholders failure to pay an
instalment, the company had declared his debenture to be forfeited, the debenture ceased to be specifically
enforceable. [Kuala Pahi Rubber Estates v. Mowbray, (1914) 111 LT 1072].
While the issue of debentures by a listed company has to comply with all the Guidelines and regulations framed
by SEBI, an unlisted company or private company has to comply with clauses as contained in its Memorandum
and Articles of Association.
Points need to know
Unsecured bonds or debentures issued by a company or issue of bonds or debentures secured by
movable property will attract the provisions of section 58A and rules made thereunder.
A company cannot issue any debentures carrying voting rights at any meeting of the company, whether
generally or in respect of particular classes of business as per Section 117.

SEBI Guidelines pertaining to Issue of debt securities


In order to facilitate development of a vibrant primary market for corporate bonds in India, Securities and Exchange
Board of India (SEBI) has notified on 19th June 2008 Regulations for Issue and Listing of Debt Securities to
provide for simplified regulatory framework for issuance and listing of non-convertible debt securities (excluding
bonds issued by Governments) issued by any company, public sector undertaking or statutory corporations.
The regulations cover issuance and listing of debt securities whether issued to the public or privately placed
which are not convertible, either in whole or in part into equity instruments. The Regulations will not apply to
issue and listing of, securitized debt instruments and security receipts for which separate regulatory regime is in
place. The full text of the SEBI (Issue and Listing of Debt Securities), Regulations, 2008 is placed as Annexure
I at the end of the study. Schedule I to IV of the said Regulations containing disclosures and formats can be
accessed from the website of SEBI at www.sebi.gov.in
Salient features of the regulations are as follows:
The Regulations provide for rationalized disclosure requirements for public issues of debt securities
and flexibility to issuers to structure their instruments and decide on the mode of offering, without diluting
the areas of regulatory concern.
In case of public issues of debt securities, while the disclosures specified under Schedule II of the
Companies Act, 1956 shall be made, the Regulations require additional disclosures about the issuer
and the instrument such as nature of instruments, rating rationale, face value, issue size, etc.
While the requirement of filing of draft offer documents with SEBI for observations has been done away
with, the issuer may file a Shelf Offer Document containing disclosures. (Regulation 21A). Emphasis
has been placed on due diligence, adequate disclosures, and credit rating as the cornerstones of
transparency.
Regulations prescribe certifications to be filed by merchant bankers in this regard.
200 PP-ACL&P

The Regulations emphasize on the role and obligations of the debenture trustees, execution of trust
deed, creation of security and creation of debenture redemption reserve in terms of the Companies Act.
The Regulations enable electronic disclosures.
The draft offer document needs to be filed with the designated stock exchange through a SEBI registered
merchant banker who shall be responsible for due diligence exercise in the issue process and the draft
offer document shall be placed on the websites of the stock exchanges for a period of seven working
days inviting comments. The documents shall be downloadable in PDF or HTML formats. The
requirements for advertisements have also been simplified.
While listing of securities issued to the public is mandatory, the issuers may also list their debt securities
issued on private placement basis subject to compliance of simplified regulatory requirements as provided
in the Regulations.
The Regulations provide an enabling framework for listing of debt securities issued on a private placement
basis, even in cases where the equity of the issuer is not listed.
NBFCs and PFIs are exempted from mandatory listing. However, they may list their privately placed
debt securities subject to compliance with the simplified requirements and Listing Agreement. A
rationalized listing agreement for debt securities is under preparation.
Notwithstanding such rescission:
(a) anything done or any action taken or purported to have been done or taken including observation made
in respect of any draft offer document, any enquiry or investigation commenced or show cause notice
issued in respect of the said guidelines shall be deemed to have been done or taken under the
corresponding provisions of these regulations;
(b) any application made to the Board under the said Guidelines and pending before it shall be deemed to
have been made under the corresponding provisions of these regulations.
The detailed procedure for issue of Debentures is explained hereunder:
1. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 will be applicable, in case the Company
wants to make
(a) public issue of debt securities; and
(b) listing of debt securities issued through public issue or on private placement basis on a recognized
stock exchange.
2. Debt securities under these regulations means non-convertible debt securities which create or
acknowledge indebtedness, and include debenture, bonds and such other securities of a body corporate
or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets
of the body corporate or not, but excludes bonds issued by Government or such other bodies as may be
specified by the Board, security receipts and securitized debt instruments.
3. The term private placement in accordance with the regulations means an offer or invitation to less than
fifty persons to subscribe to the debt securities in terms of sub-section (3) of section 67 of the Companies
Act, 1956; the term public issue means an offer or invitation by an issuer to public to subscribe to the
debt securities which is not in the nature of a private placement;
4. The Company cannot make any public issue of debt securities if as on the date of filing of draft offer
document and final offer document as provided in the regulation, the Company or the person in control
of the Company, or its promoter, has been restrained or prohibited or debarred by the Securities and
Exchange Board of India (Board) from accessing the securities market or dealing in securities and such
direction or order is in force.
Lesson 6 Issue and Redemption of Debentures and Bonds 201

5. Call a Board Meeting after giving notice to all the directors of the company as per section 286 to decide
about the issue of debentures and the steps to be taken in that regard [Section 292), keeping in view the
following matters:
(a) whether the debenture is non-convertible, or fully or partly convertible
(b) if convertible, stage(s) and terms of conversion including premium
(c) maturity period of non-convertible/non-convertible portion of partly convertible debenture
(d) rate of interest
(e) whether public/right issue
(f) credit rating
(g) appointment of trustee
(h) appointment of Lead Manager(s) and other intermediaries.
6. Make an application to one or more recognized stock exchanges for listing of such securities before the
date of filing of draft offer document and final offer document, provided that where the application is
made to more than one recognized stock exchanges, the issuer shall choose one of them as the
designated stock exchange. Where any of such stock exchanges have nationwide trading terminals,
the issuer shall choose one of them as the designated stock exchange. A simplified Listing Agreement
for debt securities has been put in place.
The Listing Agreement for debt securities as set out at Annexure III consists of two parts. The first part
prescribes only incremental disclosures which are relevant for debt securities of such issuers whose
equity shares are listed on the Exchange. The second part, which is applicable to issuers whose equity
shares are not listed on the Exchange, prescribes detailed disclosures. During the currency of listing of
equity shares, the issuer shall comply with provisions in Part A. In all other cases, the issuer shall
comply with provisions in Part B.
7. Before filing of draft offer document, the company should have obtained in-principle approval for listing
of its debt securities on the recognized stock exchanges where the application for listing has been
made;
8. Obtain credit rating from at least one credit rating agency registered with the Board and is disclosed in
the offer document, if credit ratings are obtained from more than one credit rating agencies, all the
ratings, including the unaccepted ratings, shall be disclosed in the offer document.
9. Enter into an arrangement with a depository registered with the Board for dematerialization of the debt
securities that are proposed to be issued to the public, in accordance with the Depositories Act, 1996
and regulations made there under.
10. In case, the company is a public company or its subsidiary, then obtain the permission of the General
Meeting by Ordinary Resolution unless borrowing by issue of debentures is within the borrowing limits
already sanctioned under Section 293(1)(d).
11. Also obtain the permission of the General Meeting by Ordinary Resolution under Section 293(l)(a), if the
whole or substantially the whole of any of the company's undertaking is proposed to be charged against
the debentures by usufructuary mortgage.
12. If Ordinary Resolutions are passed as aforesaid by the company then file them in e-form No. 23 along
with the Explanatory Statements with the concerned ROC within thirty days of their passing [Section
192(4] after paying the requisite fee prescribed under Schedule X to the Act.
202 PP-ACL&P

13. Forward promptly to the Stock Exchange with which the company is enlisted, three copies of the notice
and a copy of the proceedings of the General Meeting. [Clause 31 of the Listing Agreement].

14. The Company is required to appoint one or more merchant bankers who are duly registered with the
Board. One of them should be a lead merchant banker.
15. Obtain consent of the proposed trustees if the debentures are proposed to be issued under a trust deed.

16. The Company should then appoint one or more debenture trustees in accordance with the provisions of
Section 117B of the Companies Act, 1956 and Securities and Exchange Board of India (Debenture
Trustees) Regulations, 1993.

17. Prepare the draft trust deed and get the same approved by your Board authorizing some one to execute
the same [Section 117A]

18. Execute the trust deed within 3 months of the date of closure of the issue after proper stamping and get
the same registered with the registration authorities of the appropriate State.

19. Note that the debenture issue by the Company is not allowed for providing loan to or acquisition of
shares of any person who is part of the same group or who is under the same management. [sub-
regulation (5) of Regulation 4]

20. Explanation given under sub regulation (6) of regulation 4 states that

(a) two persons shall be deemed to be part of the same group if they belong to the same group within
the meaning of clause (ef) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969
(54 of 1969) or if they own inter-connected undertakings within the meaning of clause (g) of section
2 of that Act;

(b) the expression under the same management shall have the meaning derived from sub-section
(1B) of section 370 of the Companies Act, 1956 (1 of 1956).

21. In accordance with Regulation 5(1), the offer document must contain all material disclosures which are
necessary for the subscribers of the debentures to take an informed investment decision.

22. The Company and the lead merchant banker must ensure that the offer document contains the following:

(a) the disclosures specified in Schedule II of the Companies Act, 1956;


(b) disclosure specified in Schedule I of these regulations;

(c) additional disclosures as may be specified by the Board.

23. In accordance with explanation given under sub regulation (2) of regulation 5, for the purpose of point
number 21 above, material means anything which is likely to impact an investors investment decision.

24. A draft offer document is required to be filed by the Company with the designated stock exchange
through the lead merchant banker. [Sub regulation (1) of regulation 6].

25. Public comments are then invited by posting the draft offer document filed with the designated stock
exchange on the website of the designated stock exchange for a period of seven working days from the
date of filing the draft offer document with such exchange. [Sub regulation (2) of regulation 6].

26. The draft offer document may also be displayed on the website of the issuer, merchant bankers and
the stock exchanges where the debt securities are proposed to be listed. [Sub regulation (3) of
regulation 6].
27. It should be ensured by the lead merchant banker that the draft offer document clearly specifies the
names and contact particulars of the compliance officer of the lead merchant banker and the issuer
Lesson 6 Issue and Redemption of Debentures and Bonds 203

including the postal and email address, telephone and fax numbers. [Sub regulation (4) of regulation 6]
28. It should be ensured by the Lead Merchant Banker that all comments received on the draft offer document
are suitably addressed prior to the filing of the offer document with the Registrar of Companies. [Sub
regulation (5) of regulation 6].
29. A copy of draft and final offer document is also required to be forwarded to the Board for its records,
simultaneously with filing of these documents with designated stock exchange. [Sub regulation (6) of
regulation 6].
30. The lead merchant banker is required to furnish to the Board a due diligence certificate as per Schedule
II of the regulations before filing of the offer document with the Registrar of Companies. [Sub regulation
(7) of regulation 6]
31. The debenture trustee is also required to furnish to the Board a due diligence certificate as per Schedule
III of these regulations, before opening of the public issue.
32. The draft and final offer document would be displayed on the websites of stock exchanges. Also these
can be downloaded in PDF / HTML formats. [Sub regulation (1) of regulation 7].
33. The offer document is required to be filed with the designated stock exchange, simultaneously with filing
thereof with the Registrar of Companies, for dissemination on its website prior to the opening of the
issue. [Sub regulation (2) of Regulation 7]
34. In case, any person makes a request for a physical copy of the offer document, the Company or lead
merchant banker should entertain the request and provide the same to him. [Sub regulation (3) of
Regulation 7]
35. The Company is required to make a advertisement in an national daily with wide circulation, on or
before the issue opening date and such advertisement shall, amongst other things, contain the disclosures
as provided in the Schedule IV of the Regulations. [Sub regulation (1) of Regulation 8]
36. Any advertisement issued by the Company should not be misleading in material particular and should
not be manipulative or deceptive and should not contain any matters which are extraneous to the
contents of the offer document.
37. Every application form issued by the company should accompanied by a copy of the abridged prospectus
and such abridged prospectus should not contain matters which are extraneous to the contents of the
prospectus. The facility for subscription of application in electronic mode may be provided for by the
Company subject to the relevant applicable requirements as may be specified by the Board.
38. The Company may determine the price of debt securities in consultation with the lead merchant banker
and the issue may be at fixed price or the price may be determined through book building process in
accordance with the procedure as may be specified by the Board. [Regulation 11]
39. In case of a private offer, obtain applications by private negotiations.
40. On receipt of applications, complete proceeding regarding allotment. If the debentures are to be enlisted,
get the allotment scheme first approved by the Stock Exchange concerned.
41. In case, the Company has not received the minimum subscription, if decided, all the application moneys
received in the public issue is required to be refunded forthwith to the applicants. [Sub-regulation (1) to
the Regulation 12]
42. Adequate disclosures regarding underwriting arrangements are required to be disclosed in the offer
document, where public issue of debenture securities are underwritten by an underwriter registered
with the Board. [Regulation 13]
204 PP-ACL&P

43. The offer document or abridged prospectus or any advertisement issued by the Company in connection
with a public issue of debt securities should not contain any false or misleading statement. Also it should
not omit disclosure of any material fact because of which the statements made therein (in light of the
circumstances under which they are made) becomes misleading. [Regulation 14].
44. For securing the issue of debenture, a trust deed should be executed by the Company in favour of the
debenture trustee within three months of the closure of the issue. Such deed should contain the clauses
as may be prescribed under section 117A of the Companies Act, 1956 and those mentioned in Schedule
IV of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. [Regulation
15]
45. The trust deed should not contain a clause which has the effect of
(i) limiting or extinguishing the obligations and liabilities of the debenture trustees or the Company in
relation to any rights or interests of the investors;
(ii) limiting or restricting or waiving the provisions of the Act, these regulations and circulars or guidelines
issued by the Board;
(iii) indemnifying the debenture trustees or the Company for loss or damage caused by their act of
negligence or commission or omission
46. The Company should create debenture redemption reserve, for the redemption of the debt securities,
in accordance with the provisions of the Companies Act, 1956 and circulars issued by Central
Government in this regard. [Regulation 16]
47. The proposal to create a charge or security, if any, in respect of secured debt securities should be
disclosed in the offer document along with its implications.
48. The Company is required to give an undertaking in the offer document that the assets on which
charge is created are free from any encumbrances and if the assets are already charged to secure
a debt, the permissions or consent to create second or pari pasu charge on the assets of the issuer
have been obtained from the earlier creditor.
49. File e-Form No. 10 with the concerned ROC. The ROC will issue the certificate of registration which
shall be endorsed on every debenture certificate.
50. The issue proceeds should be kept in an escrow account until the documents for creation of security
as stated in the offer document, are executed. [Regulation 17]
51. Complete all other proceedings such as issuing letters of allotment, debenture certificates, making
entries in various registers, etc.

Role of Company Secretary under Listing Agreement for Debt Securities


Clause 2 and 13 of the Debt Listing Agreement authorizes Company Secretaries to issues half yearly certificate
regarding maintenance of 100% security cover in respect of listed secured debt securities.
Clause 22 of the Debt Listing Agreement requires the issuer to designate Company Secretary or any other
person as Compliance Officer responsible for ensuring compliance with the regulatory provisions applicable to
such issuance of debt securities, reporting to various authorities etc.

Redemption and roll-over


In accordance with Regulation 18 of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, the
Company is required to redeem the debt securities in terms of the offer document.
The debentures which are redeemable are to be repaid by the company in accordance with the terms and
Lesson 6 Issue and Redemption of Debentures and Bonds 205

conditions of issue. Debentures may be redeemed either out of the proceeds of a fresh issue of debentures or
shares or by creating Debenture Redemption Reserve by setting aside certain sums out of annual profits of the
company as provided under Section 117C of the Act. The debentures may be redeemed at the end of the period
for which they are issued or they may be redeemed periodically by means of drawings by lots.
In case, the Company desires to roll-over the debt securities issued by it, it shall do so only upon passing of a
special resolution of holders of such securities and give twenty one days notice of the proposed roll over to
them. The notice referred above shall contain disclosures with regard to credit rating and rationale for roll-over.
The Company should prior to sending the notice to holders of debt securities, file a copy of the notice and
proposed resolution with the stock exchanges where such securities are listed, for dissemination of the same to
public on its website.
The debt securities issued can be rolled over subject to the following conditions:
(a) The roll-over is approved by a special resolution passed by the holders of debt securities through postal
ballot having the consent of not less than 75% of the holders by value of such debt securities;
(b) atleast one rating is obtained from a credit rating agency within a period of six months prior to the due
date of redemption and is disclosed in the notice referred to in sub-regulation (2);
(c) fresh trust deed shall be executed at the time of such roll-over or the existing trust deed may be continued
if the trust deed provides for such continuation;
(d) adequate security shall be created or maintained in respect of such debt securities to be rolled-over.
The issuer shall redeem the debt securities of all the debt securities holders, who have not given their positive
consent to the roll-over.

Re-issue of redeemed debentures


Under Section 121 of the Act, the company has powers to keep alive the redeemable debentures either by re-
issuing the same debentures or by issuing fresh debentures in their place unless:
(a) there is any provision to the contrary, whether express or implied contained in the articles/memorandum
or in the conditions of issue or in any contract entered into by the company; or
(b) the company has manifested its intention to cancel the debentures by a resolution to that effect or by
some other act.
Under sub-section (5) of the section, the reissue of a debenture shall be treated as the issue of a new debenture
for the purpose of stamp duty.

IMPORTANT ASPECTS UNDER SEBI (ISSUE AND LISTING OF DEBT SECURITIES)


REGULATIONS, 2008

Obligations of Intermediaries and Issuers


Chapter V of the Regulations deals with obligations of the Debenture trustees, Issuer and Lead Merchant
Banker. The obligations as specified are explained hereunder.

Obligations of Debenture trustee [Regulation 25]


1. The debenture trustee is vested with the requisite powers for protecting the interest of holders of debt securities
including a right to appoint a nominee director on the Board of the issuer in consultation with institutional holders
of such securities.
2. The debenture trustee is under obligation to carry out its duties and perform its functions under these regulations,
206 PP-ACL&P

the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, the trust deed and offer
document, with due care, diligence and loyalty.
3. The debenture trustee is under duty to ensure disclosure of all material events on an ongoing basis.
4. The debenture trustees should supervise the implementation of the conditions regarding creation of security
for the debt securities and debenture redemption reserve.

Obligations of the Issuer, Lead Merchant Banker, etc. [Regulation 26]


1. The Company shall disclose all the material facts in the offer documents issued or distributed to the public and
should ensure that all the disclosures made in the offer document are true, fair and adequate and there is no
mis-leading or untrue statements or mis-statement in the offer document.
2. The Merchant Banker should verify and confirm that the disclosures made in the offer documents are true, fair
and adequate and ensure that the Company is in compliance with these regulations as well as all transaction
specific disclosures required in Schedule I of these regulations and Schedule II of the Companies Act, 1956.
3. The intermediaries are responsible for the due diligence in respect of assignments undertaken by them in
respect of issue, offer and distribution of securities to the public.
4. No person should employ any device, scheme or artifice to defraud in connection with issue or subscription or
distribution of debt securities which are listed or proposed to be listed on a recognized stock exchange.
5. The issuer and the merchant banker should ensure that the security created to secure the debt securities is
adequate to ensure 100% asset cover for the debt securities.

Power of SEBI to undertake Inspection and to Issue Directions

Inspection by the Board


Chapter VI of the regulations deals with the remedy in case of violation of the regulations. According to Regulation
27 of the regulations, without prejudice to the provisions of sections 11 and 11C of the SEBI Act, 1992 and
section 209A of the Companies Act, the Board may suo-motu or upon information received by it, appoint one or
more persons to undertake the inspection of the books of account, records and documents of the issuer or
merchant banker or any other intermediary associated with the public issue, disclosure or listing of debt securities,
for the specified purposes. The specified purposes are:
(a) to verify whether the provisions of the Act, Securities Contracts (Regulation) Act,1956, Depositories
Act,1996, the rules and regulations made there under in respect of issue of securities have been complied
with;
(b) to verify whether the requirement in respect of issue of securities as specified in these regulations has
been complied with;
(c) to verify whether the requirements of listing conditions and continuous disclosure requirement have
been complied with;
(d) to inquire into the complaints received from investors, other market participants or any other persons on
any matter of issue and transfer of securities governed under these regulations;
(e) to inquire into affairs of the issuer in the interest of investor protection or the integrity of the market
governed under these regulations;
(f) to inquire whether any direction issued by SEBI has been complied with.
Lesson 6 Issue and Redemption of Debentures and Bonds 207

Directions by the Board


In accordance with the Regulation 28, without prejudice to the action under section 11, 11A, 11 B, 11D, sub-
section (3) of section 12, Chapter VIA and section 24 of the SEBI Act, 1992 or section 621 of the Companies Act,
1956, the Board may suo-motu or on receipt of information or on completion or pendency of inspection or
investigation, in the interests of the securities market, issue or pass such directions as it deems fit including any
or all of the following
(a) directing the issuer to refund of the application monies to the applicants;
(b) directing the persons concerned not to further deal in securities in any particular manner;
(c) directing the persons concerned not to access the securities market for a particular period;
(d) restraining the issuer or its promoters or directors from making further issues of securities;
(e) directing the person concerned to sell or divest the securities;
(f) directing the issuer or the depository not to give effect transfer or directing further freeze of transfer of
securities;
(g) any other direction which Board may deem fit and proper in the circumstances of the case.
It is provided that the Board shall, either before or after issuing such directions, give an opportunity of being
heard to the persons against whom the directions are issued or proposed to be issued.
It is provided further that if any ex-parte direction is required to be issued, the Board may give post decisional
hearing to affected person.

9. ISSUE OF CONVERTIBLE DEBT INSTRUMENTS


SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 specifically provide the following in
relation to Convertible Debt Instruments:

1. No issuer shall make a public issue of convertible debt instrument


(a) if the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are
debarred from accessing the capital market by the Board;
(b) if any of the promoters, directors or persons in control of the issuer was or also is a promoter, director or
person in control of any other company which is debarred from accessing the capital market under any
order or directions made by the Board;
(c) if the issuer of convertible debt instruments is in the list of wilful defaulters published by the Reserve
Bank of India or it is in default of payment of interest or repayment of principal amount in respect of debt
instruments issued by it to the public, if any, for a period of more than six months;
(d) unless it has made an application to one or more recognised stock exchanges for listing of specified
securities on such stock exchanges and has chosen one of them as the designated stock exchange:
Provided that in case of an initial public offer, the issuer shall make an application for listing
of the specified securities in at least one recognised stock exchange having nationwide trading
terminals;
(e) unless it has entered into an agreement with a depository for dematerialisation of specified securities
already issued or proposed to be issued;
(f) unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited;
(g) unless firm arrangements of finance through verifiable means towards seventy five per cent. of the
208 PP-ACL&P

stated means of finance, excluding the amount to be raised through the proposed public issue or rights
issue or through existing identifiable internal accruals, have been made.
2. The lead merchant bankers shall submit to the Board along with the draft offer document a due diligence
certificate from the debenture trustee as per Form B of Schedule VI.
3. The lead merchant bankers shall submit to the Board along with the offer document in case of a fast track
issue of convertible debt instruments, a due diligence certificate from the debenture trustee as per Form B of
Schedule VI.

4. Additional requirements for issue of convertible debt instruments (Regulation 20)


(1) In addition to other requirements laid down in these regulations, an issuer making a public issue or rights
issue of convertible debt instruments shall comply with the following conditions:
(a) it has obtained credit rating from one or more credit rating agencies;
(b) it has appointed one or more debenture trustees in accordance with the provisions of section 117B of the
Companies Act, 1956 and Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993;
(c) it has created debenture redemption reserve in accordance with the provisions of section 117C of the
Companies Act, 1956;
(d) if the issuer proposes to create a charge or security on its assets in respect of secured convertible debt
instruments, it shall ensure that:
(i) such assets are sufficient to discharge the principal amount at all times;
(ii) such assets are free from any encumbrance;
(iii) where security is already created on such assets in favour of financial institutions or banks or the
issue of convertible debt instruments is proposed to be secured by creation of security on a leasehold
land, the consent of such financial institution, bank or lessor for a second or pari passu charge has
been obtained and submitted to the debenture trustee before the opening of the issue;
(iv) the security/asset cover shall be arrived at after reduction of the liabilities having a first/prior charge,
in case the convertible debt instruments are secured by a second or subsequent charge.
(2) The issuer shall redeem the convertible debt instruments in terms of the offer document.

Roll over of non convertible portion of partly convertible debt instruments. (Regulation 21)
(1) The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which
exceeds fifty lakh rupees, may be rolled over without change in the interest rate, subject to compliance with the
provisions of section 121 of the Companies Act, 1956 and the following conditions:
(a) seventy five per cent of the holders of the convertible debt instruments of the issuer have, through a
resolution, approved the rollover through postal ballot;
(b) the issuer has, along with the notice for passing the resolution, sent to all holders of the convertible debt
instruments, an auditors certificate on the cash flow of the issuer and with comments on the liquidity
position of the issuer;
(c) the issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments
of all the holders of the convertible debt instruments who have not agreed to the resolution;
(d) credit rating has been obtained from at least one credit rating agency registered with the Board within a
period of six months prior to the due date of redemption and has been communicated to the holders of
the convertible debt instruments, before the roll over;
Lesson 6 Issue and Redemption of Debentures and Bonds 209

(2) The creation of fresh security and execution of fresh trust deed shall not be mandatory if the existing trust
deed or the security documents provide for continuance of the security till redemption of secured convertible
debt instruments;
Provided that whether the issuer is required to create fresh security and to execute fresh trust deed or not shall
be decided by the debenture trustee.

Conversion of optionally convertible debt instruments into equity share capital. (Regulation
22)
(1) An issuer shall not convert its optionally convertible debt instruments into equity shares unless the holders of
such convertible debt instruments have sent their positive consent to the issuer and non-receipt of reply to any
notice sent by the issuer for this purpose shall not be construed as consent for conversion of any convertible
debt instruments.
(2) Where the value of the convertible portion of any convertible debt instruments issued by a listed issuer
exceeds fifty lakh rupees and the issuer has not determined the conversion price of such convertible debt
instruments at the time of making the issue, the holders of such convertible debt instruments shall be given the
option of not converting the convertible portion into equity shares:
Provided that where the upper limit on the price of such convertible debt instruments and justification thereon is
determined and disclosed to the investors at the time of making the issue, it shall not be necessary to give such
option to the holders of the convertible debt instruments for converting the convertible portion into equity share
capital within the said upper limit.
(3) Where an option is to be given to the holders of the convertible debt instruments in terms of sub-regulation
(2) and if one or more of such holders do not exercise the option to convert the instruments into equity share
capital at a price determined in the general meeting of the shareholders, the issuer shall redeem that part of the
instruments within one month from the last date by which option is to be exercised, at a price which shall not be
less than its face value.
(4) The provision of sub-regulation (3) shall not apply if such redemption is in terms of the disclosures made in
the offer document.

Issue of convertible debt instruments for financing. (Regulation 23)


No issuer shall issue convertible debt instruments for financing replenishment of funds or for providing loan to or
for acquiring shares of any person who is part of the same group or who is under the same management:
Provided that an issuer may issue fully convertible debt instruments for these purposes if the period of conversion
of such debt instruments is less than eighteen months from the date of issue of such debt instruments.
Explanation: For the purpose of this regulation:
(i) Two persons shall be deemed to be part of the same group if they belong to the group within the
meaning of clause (ef) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of
1969) or if they own inter connected undertakings within the meaning of clause (g) of section 2 of the
said Act;
(ii) The expression under the same management shall have the same meaning as assigned to it in sub-
section (1B) of section 370 of the Companies Act, 1956 (1 of 1956).

PRIVATE PLACEMENT OF DEBT SECURITIES


Under Regulation 2(h) of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, private placement
means an offer or invitation to less than fifty persons to subscribe to the debt securities in terms of sub-section
(3) of section 67 of the Companies Act, 1956 (1 of 1956);
210 PP-ACL&P

The regulations apply to a company which proposes to issue debt securities on private placement basis (i.e. not
through public issue) and get them listed on a stock exchange.
A listed company shall intimate to the Exchange, of its intention to raise funds through new debt securities either
through a public issue or on private placement basis (if it proposes to list such privately placed debt securities on
the Exchange) prior to issuing such securities;
The important regulations governing issue of debt securities on private placement basis are summarized below:

Regulation 19(3)
Where the issuer has disclosed the intention to seek listing of debt securities issued on private placement basis,
the issuer shall forward the listing application along with the disclosures specified in Schedule I to the recognized
stock exchange within fifteen days from the date of allotment of such debt securities.

Regulation 20: Conditions for listing of debt securities issued on private placement basis
(1) An issuer may list its debt securities issued on private placement basis on a recognized stock exchange
subject to the following conditions:
(a) the issuer has issued such debt securities in compliance with the provisions of the Companies Act,
1956, rules prescribed thereunder and other applicable laws;
(b) credit rating has been obtained in respect of such debt securities from at least one credit rating agency
registered with the Board;
(c) the debt securities proposed to be listed are in dematerialized form ;
(d) the disclosures as provided in regulation 21 have been made.
(2) The issuer shall comply with conditions of listing of such debt securities as specified in the Listing Agreement
with the stock exchange where such debt securities are sought to be listed.

Regulation 21: Disclosures in respect of Private Placements of Debt


(1) The issuer making a private placement of debt securities and seeking listing thereof on a recognized stock
exchange shall make disclosures in a disclosure document as specified in Schedule I of these regulations
accompanied by the latest Annual Report of the issuer.
(2) The disclosures as provided in sub-regulation (1) shall be made on the web sites of stock exchanges where
such securities are proposed to be listed and shall be available for download in PDF / HTML formats.

Regulation 21 A: Filing of Shelf Disclosure Document.


(1) An issuer making a private placement of debt securities and seeking listing thereof on a recognised stock
exchange may file a Shelf Disclosure Document containing disclosures as provided in Schedule I.
(2) An issuer filing a Shelf Disclosure Document under sub-regulation (1), shall not be required to file disclosure
document, while making subsequent private placement of debt securities for a period of 180 days from the date
of filing of the shelf disclosure document: Provided that the issuer while making any private placement under
Shelf Disclosure Document, shall file with the concerned stock exchange updated disclosure document with
respect to each tranche, containing details of the private placement and material changes, if any, in the information
provided in Shelf Disclosure Document.

Regulation 22: Relaxation of strict enforcement of rule 19 of Securities Contracts (Regulation)


Rules, 1957
The Securities and Exchange Board of India has relaxed the strict enforcement of:
Lesson 6 Issue and Redemption of Debentures and Bonds 211

(a) sub-rules (1) and (3) of rule 19 the said rules in relation to listing of debt securities issued by way of a
private placement;
(b) clause (b) of sub-rule (2) of rule 19 of the said Rules in relation to listing of debt securities issued by way
of a private placement by any issuer;

Regulation 23: Continuous Listing Conditions


(1) All the issuers making public issues of debt securities or seeking listing of debt securities issued on private
placement basis shall comply with the conditions of listing specified in the respective listing agreement for debt
securities.
The procedure for issue of debt securities on private placement basis is similar to the one prescribed for issue
of other debt instruments.
To obtain listing approval from the stock exchange, the company is required to submit the following documents:
(a) Letter of Application (i.e. by Listed companies applying for listing of further issue) duly completed Annexure
I;
(b) Issue details of the new securities issued as per format enclosed as Annexure II;
(c) Certified copy of the resolution passed by board of directors for allotment of debt securities;
(d) Certified copy of Credit Rating Certificate obtained before issuing the Debt instruments from Credit
Rating Agency(ies) and their validity period;
(e) Certified copy of confirmation letter from the debenture Trustee intimating the company that they are
acting as the debenture trustee of these debt instruments;
(f) Certified copy of letter issued by Depositories (NSDL/CDSL) intimating about the allotment of the ISIN
(final ISIN after conversion of LOA) for these securities;
(g) Certified copy of the Debenture Trust Deed (upon execution);
(h) Certificate from the Managing Director/Company Secretary of the company, as per format given in
Annexure III ;
(i) In case of listing of a structured product as defined in the SEBI Circular dated September 28, 2011, a
certificate from the Managing Director/Company Secretary of the company, as per format given in
Annexure IV ;
(j) Confirmation for authentication on SEBI for SCORES;
(k) Soft copy in pdf form and certified true copy of Disclosure document (Offer Document) prepared as per
Schedule I of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
(l) Debt Listing Agreement;
(m) Statement containing particulars of dates of, and parties to all material contracts and agreements;
(n) In case of NBFC, a copy of RBIs certificate confirming whether the issuer is deposit taking or non-
deposit taking NBFC;
(o) Memorandum and Articles of Association of the company;
(p) Copy of latest audited Balance Sheet and Annual Report;
212 PP-ACL&P

SEBI (PUBLIC OFFER AND LISTING OF SECURITISED DEBT INSTRUMENTS) REGULATIONS,


2008
SEBI has notified SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 on May 26,
2008 taking into account the market needs, cost of the transactions, competition policy, the professional expertise
of credit rating agencies, disclosures and obligations of the parties involved in the transaction and the interest of
investors in such instruments. Salient features of the regulations are as follows: -
(a) The special purpose distinct entity i.e. issuer shall be in the form of a trust, the trustees thereof will
require registration from SEBI. The registration granted to a trustee shall be permanent subject to
compliance with the provisions with the SCRR and the regulations and payment of appropriate fees.
(b) If a debenture trustee registered with SEBI or a securitization company or a asset reconstruction company
registered with Reserve Bank of India or National Housing Bank or the NABARD is the trustee of the
issuer no registration from SEBI to act as such shall be required.
(c) The securitized debt instruments issued to public or listed on recognized stock exchange shall
acknowledge the beneficial interest of the investors in underlying debt or receivables assigned to the
issuer. The regulations provide flexibility in terms of pay through/pass through structures and do not
restrict any particular mode.
(d) The assignment of assets to the issuer shall be a true sale. The debt or receivables assigned to the
issuer should be expected to generate identifiable cash flows for the purpose of servicing the instrument
and the originator should have valid enforceable interests in the assets and in cash flow of assets prior
to securitization.
(e) Originator shall be an independent entity from the issuer and its trustees and the originator and its
associates shall not exercise any control over the issuer. However, the originator may be appointed as
a servicer. The issuer may appoint any other person as servicer in respect of any its schemes to co-
ordinate with the obligors, manage the said pool and collection therefrom, administer the cash flows of
asset pool, distribution to investors and reinvestments. The issuer shall not acquire any debt or receivables
from any originator who is part of the same group or which is under the same management as the
trustee. Regulations require strict segregation of assets of each scheme.
(f) The issuer may offer securitised debt instruments to public for subscription through an offer document
containing disclosures of all relevant material facts including financials of the issuer, originator, quality of
the asset pool, disclosure of various kinds of risks, credit ratings including unaccepted ratings,
arrangements made for credit enhancement, liquidity facilities availed, underwriting of the issue etc.
apart from the routine disclosures relating to issue, offer period, application, etc.
(g) Rating from atleast two credit rating agencies is mandatory and all ratings including unaccepted ratings
shall be disclosed in the offer documents. The rating rationale should include reference to the quality of
the said pool and strengthen of cash flows, originator profile, payment structure, risks and concerns for
investors, etc.
(h) The instrument shall be in dematerialized form.
(i) The draft offer document shall be filed with SEBI atleast 15 days before opening of the issue.
(j) In case of public issuances listing will be mandatory. The instruments issued on private placement basis
may also be listed subject to the compliance of simplified provisions of the regulations. The securitised
debt instruments issued to the public or listed on a recognized stock exchange in accordance with these
regulations shall be freely transferable.
(k) It has been proposed to introduce simplified and relaxed listing agreement. Listing of private placement
Lesson 6 Issue and Redemption of Debentures and Bonds 213

is also permitted subject to the compliance of simplified provisions of the listing agreement and the
regulations. The simplified listing agreement is under preparation.
Please refer http://www.bseindia.com for detailed checklist for listing of privately placed debt issuances.

PROCEDURE FOR ISSUE OF SHARES ON CONVERSION OF DEBENTURES OR LOANS INTO


SHARES
1. Where the conversion period is on or before a certain time, convene a Board meeting after giving notice to all
directors of the company as per section 286 to decide on the date of conversion, consider the terms and
conditions of the debentures or loans giving option for conversion into shares and number of debenture holders
who have exercised the option, by passing necessary resolutions.
2. Where the conversion price is linked to market price of underlying equity shares, work out the conversion
price on the basis of pricing formula stated in the offer document.
3. Such issue of shares caused by the exercise of an option attached to debentures issued or loans raised by
the company need not comply with the provisions of section 81 provided the issue complied with the following
conditions:-
(i) the issue had been made with the previous approval of the Central Government; or
(ii) the issue conforms to the following conditions of rule 3 of the Public Companies (Terms of Issue of
Debentures and Raising of Loans with option to convert such Debentures or Loans into Shares) Rules,
1977. (See Annexure IV for full text of the Rules.)
(iii) having regard to the financial position of the company, the terms of issue of the debentures or the terms
of the loans, rate of interest payable on them, capital of the company, its loans, liabilities, its reserves, its
profits during the immediately five years and the current market price of the shares of the company, the
financial institution of scheduled bank provide for a term that an option will be there to convert those
debentures or loans or any part thereof into shares in the company or to subscribe for shares therein
either at par or at a premium not exceeding twenty-five percent of the face value of the shares
4. Remember that a public financial institution or a scheduled bank shall not convert all or any part of such
debentures or loans unless, the company that has issued the debentures or raised the loan has defaulted in the
repayment/redemption of, or payment of interest on, such loans or debentures and such scheduled bank or
public financial institution has given the company notice of its intention to convert such loans or debentures at
least 30 days prior to the intended date of conversion.
5. Also remember that if the issue was made to or loans obtained from any person other than the Government or
any institution specified by it then in addition to complying with either of the requirements mentioned in above
Item No. 3, the issue had been previously approved by a Special Resolution before it was made. [Section 81 (3)
proviso (b)]
6. If the company is listed then it should also comply with the provisions of Regulation 22 of SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 relating to conversion of optionally convertible debt
instruments into equity share capital as stated above.
7. Where the option to convert has been exercised, call a Board meeting after giving notice to all the directors of
the company as per section 286 and allot shares on conversion of debentures or loans by passing necessary
resolutions.
8. Within thirty days of the allotment of shares, the company should, in compliance with the provisions of Section
75 of the Companies Act, 1956, file with the concerned Registrar of Companies, a return of allotment in the e-
form 2 after paying the requisite fee as per Schedule X to the Act electronically.
214 PP-ACL&P

9. Ensure that the said e-form 2 is signed by the managing director or director or manager or secretary of the
company duly authorized by the Board.
10. Further ensure that this e-form is pre-certified by company secretary/ chartered accountant/cost accountant
(in whole-time practice) by affixing his Digital Signature.
11. Keep in mind that share certificates to be issued on conversion of debentures are as far as possible in
marketable lots and, in respect of the balance which is in odd lots, in denomination of 1-2-5-10-20-50 shares.
[Vide Schedule VIII Part A(XII)(A)(10)(d) of SEBI (ICDR) Regulations.

Conversion into preference shares


The company had converted its debentures into preference shares on Supreme Court orders. SEBI ordered the
company to refund the amount to debenture holders. This order was held to be not enforceable. [Toubro Infotech
& Industries Ltd. vs. SEBI, (2005) 123 Com Cases 75 (SAT)].

ISSUE OF PUBLIC SECTOR BONDS


As per Guidelines for Floatation of Public Sector Bonds dated 06-01-1992 issued by Ministry Finance, Department
of Economic Affairs, the procedure to float public sector bonds is as under:-
1. The bonds can be issued only by public sector undertakings whose equity capital is wholly owned by Central
Government.
2. The bonds can be issued for any of the following objects :
(1) setting up of new business;
(2) expansion or diversification of existing projects;
(3) making normal capital expenditure for modernization; and
(4) augmenting the long-term resources of the company for working capital requirements.
3. Make an application to the Ministry of Finance, Department of Economic Affairs, setting out complete details
of the scheme.
4. Ministry of Finance will consider the application on the recommendations of the administrative Ministry controlling
the undertaking and the administrative Ministry will make its recommendations after obtaining Presidential sanction
and concurrence of Planning Commission.
5. Determine the quantum of issue after ensuring that debt-equity ratio does not exceed 4:1.
6. Decide whether the proposed issue is taxable bonds or tax free bonds and their period of maturity.
7. Obtain specific approval of Department of Economic Affairs and CBDT for the rate of interest on the bonds,
and for the mode and mechanism for payment of interest to the investors.
8. Issue bonds in the denomination of ` 1,000, ` 5,000 or ` 10,000.
9. Remember the tax-free bonds are subject to lock-in period of 3 years, and taxable bonds are subject to lock-
in period of one year, from the date of allotment.
10. Make arrangements for buy-back of bonds on the expiry of the lock-in period, upto a face value of ` 40,000
from any individual investors.
11. If bonds are placed with public sector investment institutions, obtain prior approval of Ministry of Finance.
12. Appoint one or more nationalized banks or all-India financial institutions as Manager(s) to the issue and to
post-issue activities.
Lesson 6 Issue and Redemption of Debentures and Bonds 215

13. Obtain approval of CBDT, prior to issuing of bonds to the public for tax exemptions.
14. Make an application to the Stock Exchange(s) for enlisting of the bonds.

ISSUE OF BONUS BONDS


1. The bonds can be issued only by public sector undertakings whose equity capital is wholly owned by Central
Government.
2. Check whether the Articles of Association of the company authorize the company to issue bonus bonds and
if it does not then complete the proceedings to alter them accordingly.
3. Determine in advance of such issue of bonus bonds the following:
(i) the rate of interest;
(ii) whether to be convertible or non-convertible;
(iii) maturity period of the bonds; and
(iv) the quantum of issue keeping in mind the required debt equity ratio.
4. Ensure that the undertaking has enough free reserves built out of the genuine profits or share premium
collected in cash only to issue bonus bonds.
5. Ensure that reserves created by revaluation of fixed assets of the undertaking are not utilized.
6. Make an application to the Ministry of Finance, Department of Economic Affairs, setting out complete details
of the scheme.
7. Ministry of Finance will consider the application on the recommendations of the administrative Ministry controlling
the undertaking.
8. Determine the quantum of issue after ensuring that debt-equity ratio does not exceed 4:1.
9. Decide whether the proposed issue is taxable bonds or tax free bonds and their period of maturity.
10. Convene a Board meeting after issuing notices to the directors of the company as per section 286 to
consider the issue of bonds and also for taking necessary steps in that regard including fixing the date of closure
of books in consultation with designated stock exchange and to fix the date, time and place for convening a
general meeting and to pass special resolution for the same.
11. Obtain credit rating of not less than investment grade from two registered credit rating agencies and if the
company has obtained credit rating from more than two credit rating agencies disclose all the credit ratings
including the unaccepted credit rating.
12. The bonus issue of bonds should be made within a period of six months from the date of approval of the
Board of directors.
13. Hold the general meeting and pass special resolution by three-fourths majority.
14. File the special resolution along with the explanatory statement with the concerned ROC in e-form 23 within
30 days.
15. Convene another Board meeting as per section 286 and complete proceedings regarding allotment of
bonus bonds.
16. Complete all other proceedings for the issue of bond certificates by making necessary entries in various registers.
17. If the shares of the company are listed on stock exchange, then make an application to the Stock Exchange(s)
for enlistment of the bonus bonds.
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ANNEXURES
ANNEXURE I
THE GAZETTE OF INDIA
EXTRAORDINARY
PART III SECTION 4
PUBLISHED BY AUTHORITY
NEW DELHI, JUNE 6, 2008
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 6th June, 2008
SECURITIES AND EXCHANGE BOARD OF INDIA
(ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008 (AS AMENDED UPTO
12TH October, 2012)
LAD-NRO/GN/2008/13/127878- In exercise of the powers under section 30 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations, namely:-
CHAPTER I
PRELIMINARY
1. Short title, and commencement
(1) These Regulations may be called the Securities and Exchange Board of India (Issue and Listing of Debt
Securities) Regulations, 2008.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions
(1) In these Regulations, unless the context otherwise requires,
(a) Act means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(b) advertisement includes notices, brochures, pamphlets, circulars, show cards, catalogues, hoardings,
placards, posters, insertions in newspaper, pictures, films, cover pages of offer documents or any other
print medium, radio, television programmes through any electronic medium;
(c) Board means the Securities and Exchange Board of India established under provisions of Section 3 of Act;
(d) book building means a process undertaken prior to filing of prospectus with the Registrar of Companies
by means of circulation of a notice, circular, advertisement or other document by which the demand for
the debt securities proposed to be issued by an issuer is elicited and the price and quantity of such
securities is assessed;
(e) debt securities means a non-convertible debt securities which create or acknowledge indebtedness,
and include debenture, bonds and such other securities of a body corporate or any statutory body
constituted by virtue of a legislation, whether constituting a charge on the assets of the body corporate
or not, but excludes bonds issued by Government or such other bodies as may be specified by the
Board, security receipts and securitized debt instruments;
(f) designated stock exchange means a stock exchange in which securities of the issuer are listed or
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proposed to be listed and which is chosen by the issuer for the purposes of a particular issue under
these regulations;
(g) "issuer means any company, public sector undertaking or statutory corporation which makes or proposes
to make an issue of debt securities in accordance with these regulations or which has its securities
listed on a recognized stock exchange or which seeks to list its debt securities on a recognized stock
exchange;
(h) private placement means an offer or invitation to less than fifty persons to subscribe to the debt securities
in terms of sub-section (3) of section 67 of the Companies Act, 1956 (1 of 1956);
(i) public issue means an offer or invitation by an issuer to public to subscribe to the debt securities which
is not in the nature of a private placement;
(j) offer document means prospectus and includes any such document or advertisement whereby the
subscription to debt securities are invited by the issuer from public ;
(k) recognised stock exchange means any stock exchange which is recognised under section 4 of the
Securities Contracts (Regulation) Act, 1956;
(l) schedule" means a schedule annexed to these regulations;
(m) specified means specified by a general or special order or circular issued under the Act or these
regulations.
(2) All other words and expressions used but not defined in these regulations, shall have the same meanings
respectively assigned to them in the Act or the Companies Act, 1956 or Securities Contracts (Regulation) Act,
1956 or the Depositories Act, 1996 or the Rules and the Regulations made thereunder or any statutory modification
or reenactment thereto, unless the context requires otherwise.
3. Applicability
These regulations shall apply to-
(a) public issue of debt securities; and
(b) listing of debt securities issued through public issue or on private placement basis on a recognized
stock exchange.
CHAPTER II
ISSUE REQUIREMENTS FOR PUBLIC ISSUES
4. General Conditions
(1) No issuer shall make any public issue of debt securities if as on the date of filing of draft offer document and
final offer document as provided in these regulations, the issuer or the person in control of the issuer, or its
promoter, has been restrained or prohibited or debarred by the Board from accessing the securities market or
dealing in securities and such direction or order is in force.
(2) No issuer shall make a public issue of debt securities unless following conditions are satisfied, as on the date
of filing of draft offer document and final offer document as provided in these regulations,
(a) it has made an application to one or more recognized stock exchanges for listing of such securities
therein: Provided that where the application is made to more than one recognized stock exchanges, the
issuer shall choose one of them as the designated stock exchange:
Provided further that where any of such stock exchanges have nationwide trading terminals, the issuer
shall choose one of them as the designated stock exchange;
218 PP-ACL&P

Explanation: For any subsequent public issue, the issuer may choose a different stock exchange as a
designated stock exchange subject to the requirements of this regulation;
(b) it has obtained in-principle approval for listing of its debt securities on the recognized stock exchanges
where the application for listing has been made;
(c) credit rating has been obtained from at least one credit rating agency registered with the Board and is
disclosed in the offer document:
Provided that where credit ratings are obtained from more than one credit rating agencies, all the ratings,
including the unaccepted ratings, shall be disclosed in the offer document;
(d) it has entered into an arrangement with a depository registered with the Board for dematerialization of
the debt securities that are proposed to be issued to the public, in accordance with the Depositories
Act,1996 and regulations made thereunder.
(3) The issuer shall appoint one or more merchant bankers registered with the Board at least one of whom shall
be a lead merchant banker.
(4) The issuer shall appoint one or more debenture trustees in accordance with the provisions of Section 117B
of the Companies Act, 1956 (1 of 1956) and Securities and Exchange Board of India (Debenture Trustees)
Regulations, 1993.
(5) The issuer shall not issue debt securities for providing loan to or acquisition of shares of any person who is
part of the same group or who is under the same management.
Explanation: For the purposes of sub-regulation (5), -
(a) two persons shall be deemed to be part of the same group if they belong to the same group within the
meaning of clause (ef) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of
1969) or if they own inter-connected undertakings within the meaning of clause (g) of section 2 of that
Act;
(b) the expression under the same management shall have the meaning derived from sub-section (1B) of
section 370 of the Companies Act, 1956 (1 of 1956).
5. Disclosures in the offer document
(1) The offer document shall contain all material disclosures which are necessary for the subscribers of the debt
securities to take an informed investment decision.
(2) Without prejudice to the generality of sub-regulation (1), the issuer and the lead merchant banker shall
ensure that the offer document contains the following:
(a) the disclosures specified in Schedule II of the Companies Act, 1956;
(b) disclosure specified in Schedule I of these regulations;
(c) additional disclosures as may be specified by the Board.
Explanation: For the purpose of this regulation, material means anything which is likely to impact an investors
investment decision.
6. Filing of draft offer document
(1) No issuer shall make a public issue of debt securities unless a draft offer document has been filed with the
designated stock exchange through the lead merchant banker.
(2) The draft offer document filed with the designated stock exchange shall be made public by posting the same
on the website of the designated stock exchange for seeking public comments for a period of seven working
days from the date of filing the draft offer document with such exchange.
Lesson 6 Issue and Redemption of Debentures and Bonds 219

(3) The draft offer document may also be displayed on the website of the issuer, merchant bankers and the stock
exchanges where the debt securities are proposed to be listed.
(4) The lead merchant banker shall ensure that the draft offer document clearly specifies the names and contact
particulars of the compliance officer of the lead merchant banker and the issuer including the postal and email
address, telephone and fax numbers.
(5) The Lead Merchant Banker shall ensure that all comments received on the draft offer document are suitably
addressed prior to the filing of the offer document with the Registrar of Companies.
(6) A copy of draft and final offer document shall also be forwarded to the Board for its records, simultaneously
with filing of these documents with designated stock exchange.
(7) The lead merchant banker shall, prior to filing of the offer document with the Registrar of Companies, furnish
to the Board a due diligence certificate as per Schedule II of these regulations.
(8) The debenture trustee shall, prior to the opening of the public issue, furnish to the Board a due diligence
certificate as per Schedule III of these regulations.
7. Mode of Disclosure of Offer Document
(1) The draft and final offer document shall be displayed on the websites of stock exchanges and shall be
available for download in PDF/HTML formats.
(2) The offer document shall be filed with the designated stock exchange, simultaneously with filing thereof with
the Registrar of Companies, for dissemination on its website prior to the opening of the issue.
(3) Where any person makes a request for a physical copy of the offer document, the same shall be provided to
him by the issuer or lead merchant banker.
8. Advertisements for Public issues
(1) The issuer shall make a advertisement in an national daily with wide circulation, on or before the issue
opening date and such advertisement shall, amongst other things, contain the disclosures as per Schedule IV.
(2) No issuer shall issue an advertisement which is misleading in material particular or which contains any
information in a distorted manner or which is manipulative or deceptive.
(3) The advertisement shall be truthful, fair and clear and shall not contain a statement, promise or forecast
which is untrue or misleading.
(4) Any advertisement issued by the issuer shall not contain any matters which are extraneous to the contents of
the offer document.
(5) The advertisement shall urge the investors to invest only on the basis of information contained in the offer
document.
(6) Any corporate or product advertisement issued by the issuer during the subscription period shall not make
any reference to the issue of debt securities or be used for solicitation.
9. Abridged Prospectus and application forms
(1) The issuer and lead merchant banker shall ensure that:
(a) every application form issued by the issuer is accompanied by a copy of the abridged prospectus;
(b) the abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus;
(c) adequate space shall be provided in the application form to enable the investors to fill in various details
like name, address, etc.
220 PP-ACL&P

(2) The issuer may provide the facility for subscription of application in electronic mode.
10. Electronic Issuances
An issuer proposing to issue debt securities to the public through the on-line system of the designated stock
exchange shall comply with the relevant applicable requirements as may be specified by the Board.
11. Price Discovery through Book Building
The issuer may determine the price of debt securities in consultation with the lead merchant banker and the
issue may be at fixed price or the price may be determined through book building process in accordance with
the procedure as may be specified by the Board.
12. Minimum subscription
(1) The issuer may decide the amount of minimum subscription which it seeks to raise by issue of debt securities
and disclose the same in the offer document.
(2) In the event of non receipt of minimum subscription all application moneys received in the public issue shall
be refunded forthwith to the applicants.
13. Underwriting
A public issue of debt securities may be underwritten by an underwriter registered with the Board and in such a
case adequate disclosures regarding underwriting arrangements shall be disclosed in the offer document.
14. P